ARGAN INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

The following discussion summarizes the financial position of Argan, Inc. and
its subsidiaries as of April 30, 2022, and the results of their operations for
the three month periods ended April 30, 2022 and 2021, and should be read in
conjunction with (i) the unaudited condensed consolidated financial statements
and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and
(ii) the consolidated financial statements and accompanying notes included in
our Annual Report on Form 10-K for Fiscal 2022 that was filed with the SEC on
April 13, 2022 (the “Annual Report”).

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Cautionary Statement Regarding Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor”
for certain forward-looking statements. We have made statements in this Item 2
and elsewhere in this Quarterly Report on Form 10-Q that may constitute
“forward-looking statements.” The words “believe,” “expect,” “anticipate,”
“plan,” “intend,” “estimate,” “foresee,” “should,” “would,” “could,” or other
similar expressions are intended to identify forward-looking statements. Our
forward-looking statements, including those relating to the potential effects of
the COVID-19 pandemic on our business, financial position and results of
operations, are based on our current expectations and beliefs concerning future
developments and their potential effects on us. There can be no assurance that
future developments affecting us will be those that we anticipate. All comments
concerning our expectations for future revenues and operating results are based
on our forecasts for existing operations and do not include the potential impact
of any future acquisitions.

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

Business Description

Argan is a holding company that conducts operations through its wholly-owned
subsidiaries, GPS, APC, SMC and TRC. Through GPS and APC, we provide a full
range of engineering, procurement, construction, commissioning, operations
management, maintenance, development, technical and consulting services to the
power generation market, including the renewable energy sector, for a wide range
of customers, including independent power project owners, public utilities,
global energy plant construction firms and other commercial firms with
significant power requirements. GPS and APC represent our power industry
services reportable segment. Through TRC, the industrial fabrication and field
services reportable segment provides on-site services that support maintenance
turnarounds, shutdowns and emergency mobilizations for industrial plants
primarily located in the southeast region of the U.S. and that are based on its
expertise in producing, delivering and installing fabricated steel components
such as piping systems and pressure vessels. Through SMC Infrastructure
Solutions, the telecommunications infrastructure services segment provides
project management, construction, installation and maintenance services to
commercial, local government and federal government customers primarily in the
Mid-Atlantic region of the U.S.

We intend to make additional opportunistic acquisitions and/or investments by
identifying companies with significant potential for profitable growth and
realizable synergies with one or more of our existing businesses. However, we
may have more than one industrial focus depending on the opportunity. We expect
that significant acquired companies will be operated in a manner that best
provides cash flows for the Company and value for our stockholders.

Overview

Operating Results

Consolidated revenues for the three months ended April 30, 2022 were $100.3
million, which represented a decrease of $26.0 million, or 20.6%, from
consolidated revenues of $126.3 million reported for the three months ended
April 30, 2021.

The revenues of the power industry services segment decreased by $23.2 million
to $73.9 million for the three months ended April 30, 2022, from $97.2 million
reported for the three months ended April 30, 2021. The revenues of this
reportable segment of our business represented 73.7% and 76.9% of corresponding
consolidated revenues for the three months ended April 30, 2022 and 2021,
respectively. The industrial services business reported revenues of $22.5
million for the three months ended April 30, 2022. This amount represented a
decrease of $4.2 million, or 15.7%, from revenues of $26.7 million reported by
TRC for the three months ended April 30, 2021. Revenues provided by this
reportable business segment represented 22.4% and 21.1% of corresponding
consolidated revenues for the three months ended April 30, 2022 and 2021,
respectively.

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Consolidated gross profit for the three-month period ended April 30, 2022 was
$19.7 million, or 19.6% of the corresponding consolidated revenues, which
reflected primarily favorable contributions from the power industry services and
industrial services segments. For the three-month period ended April 30, 2021,
the consolidated gross profit was $23.7 million, which represented approximately
18.8% of the corresponding amount of consolidated revenues.

Selling, general and administrative expenses for the three months ended April
30, 2022 and 2021 were $10.6 million, or 10.6% of corresponding consolidated
revenues, and $9.9 million, or 7.8% of corresponding consolidated revenues,
respectively.

Due primarily to the decrease in consolidated pre-tax book income to $9.8
million for the three months ended April 30, 2022 from $14.5 million for the
three months ended April 30, 2021, we reported income tax expense in the amount
of $2.3 million for the current period. Income tax expense for the three months
ended April 30, 2021 was $3.8 million.

For the three months ended April 30, 2022, our favorable overall operating
profit performance resulted in net income attributable to our stockholders in
the amount of $7.5 million, or $0.50 per diluted share. For the comparable
period last year, we reported net income attributable to our stockholders in the
amount of $10.8 million, or $0.67 per dilutive share.

The primary drivers of our financial performance for the three months ended
April 30, 2022 and 2021 were the revenues and gross margin contributions
associated with the construction projects of GPS. These projects represented the
largest portion of our business for the periods.

All of our businesses have been adversely impacted, to some degree, by
difficulties presented by the COVID-19 pandemic.

We believe that all of our operating companies have managed the challenges
presented by this ongoing pandemic with relative success so far. A significant
amount of effort has been spent by senior and project management to ensure the
safety of our employees during the COVID-19 pandemic while we continued to
satisfy our customer obligations. However, the resurgence of new COVID-19 virus
variants represents uncertainty regarding our realizing expected financial
results for the remainder of the year if new outbreaks prevent our work crews
from completing project work as scheduled.

Engineering, Procurement and Construction Service Contracts

At April 30, 2022, our consolidated project backlog amount of $0.7 billion
substantially consisted of the projects of the power industry services reporting
segment. The comparable backlog amount as of January 31, 2022 was also $0.7
billion. Our reported amount of project backlog at a point in time represents
the total value of projects awarded to us that we consider to be firm as of that
date less the amounts of revenues recognized to date on the corresponding
projects (project backlog is larger than the value of remaining unsatisfied
performance obligations, or RUPO, on active contracts; see Note 2 to the
accompanying consolidated financial statements).

Typically, we include the total value of EPC services and other major
construction contracts in project backlog when we receive a corresponding notice
to proceed from the project owner. However, we may include the value of an EPC
services contract prior to the receipt of a notice to proceed if we believe that
it is probable that the project will commence within a reasonable timeframe,
among other factors. Projects that are awarded to us may remain included in our
backlog for extended periods of time as customers experience project delays.
However, cancellations or reductions may occur that would reduce project backlog
and that could adversely affect our expected future revenues.

A meaningful amount of the project backlog amount at April 30, 2022 was
represented by the Guernsey Power Station, the largest single-phase, gas-fired,
power plant construction project in the U.S. Substantial completion of this
project is currently scheduled to occur near the end of Fiscal 2023.

Despite our commitment to the construction of state-of-the-art, natural
gas-fired power plants as important elements of our country’s
electricity-generation mix in the future, we have been directing certain
business development efforts to winning projects for the erection of
utility-scale wind farms and solar fields and for the construction of
hydrogen-based and other renewable energy projects. We have successfully
completed these types of projects in the past and we have renewed efforts to
obtain new work in the renewable power sector that will complement our natural
gas-fired EPC services projects going forward.

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These efforts led to our announcement in May 2021 that GPS entered into an EPC
services contract with CPV Maple Hill Solar, LLC, an affiliate of Competitive
Power Ventures, Inc., to construct the Maple Hill Solar facility, which we
believe will be among the largest solar-powered energy plants in Pennsylvania.
Project activities were begun by GPS immediately. Project completion is
currently scheduled to occur during the second half of Fiscal 2023. The unique
Maple Hill Solar project, which is located in Cambria County, is being
constructed using over 235,000 photovoltaic modules to generate approximately
100 MW of electrical power.

The business development efforts conducted by our APC operations have resulted
in a significant increase in the project backlog of this business. The most
significant award occurred in October 2021 as APC entered into an engineering
and construction services contract with EPUKI London, U.K., to construct a 2 x
330 MW natural gas-fired power plant in Carrickfergus that is near Belfast,
Northern Ireland, and that will replace coal-fired units at the site. The
facility, referred to as the “Kilroot” project, is being developed by EPNI
Energy Limited. A notice to proceed was received and project activities have
commenced. The overall completion of this project is expected to occur in the
latter half of Fiscal 2024.

We recently announced that, in May 2022, APC entered into engineering and
construction services contracts with the Electricity Supply Board (“ESB”) to
construct three 65 MW aero-derivative gas turbine flexible generation power
plants in and around Dublin, Ireland. Two of the power plants, the Poolbeg and
Ringsend FlexGen Power Plants, will be located on the Poolbeg Peninsula, and the
Corduff FlexGen Power Plant will be built in Goddamendy, Dublin. All three
projects cleared the applicable capacity auction earlier this year and are
expected to operate intermittently during peak periods of electricity demand and
as back-up supply options when renewable electricity generation is limited. A
full notice to proceed has been received and project activities have commenced.
The completion of each power plant is expected to occur near the end of Fiscal
2024.

Market Outlook

The overall growth of our power business has been substantially based on the
number of combined cycle gas-fired power plants built by us, as many coal-fired
plants have been shut down. In 2010, coal-fired power plants accounted for about
45% of net electricity generation. For 2021, coal fueled approximately 22% of
net electricity generation. On the other hand, natural-gas fired power plants
provided approximately 38% of the electricity generated by utility-scale power
plants in the U.S. in 2021, representing an increase of 60% from the amount of
electrical power generated by natural gas-fired power plants in 2010, which
provided approximately 24% of net electricity generation for 2010. Undoubtedly,
the long-term historic decline in the use of coal as a power source in the U.S.
was caused, to a significant extent, by the plentiful supply of domestic and
generally inexpensive natural gas which made it the fuel of choice for power
plant developers over this period.

In the reference case of its Annual Energy Outlook 2022, the Energy Information
Administration (“EIA”) projects average increases to utility-scale electricity
generation in the U.S. of slightly less than 1% per year from 2022 through 2050.
The shift from coal to natural gas as a power plant energy source in the U.S. is
expected to continue as the EIA projects that coal-fired generation will decline
by 45% from 2022 through 2050, and will represent only 11% of the net
electricity generation mix by the end of this period. The net electricity
generation from natural gas-fired power plants is projected to increase by 17%
in the U.S. by 2050. The pace of the historic increase in the preference for
natural gas as an electricity generating fuel source also was energized, in
part, by environmental activism and restrictive regulations targeting coal-fired
power plants. Now, the environmentalist opposition against coal-fired power
generation has expanded meaningfully to target all fossil fuel energy projects,
including power plants and pipelines, and has evolved into powerful support for
renewable energy sources.

Protests against fossil-fuel related energy projects continue to garner media
attention and stir public skepticism about new projects resulting in delays due
to onsite protest demonstrations, indecision by local officials and lawsuits.
Various cities, counties and states have adopted clean energy and carbon-free
goals or objectives with achievement expected by a certain future date,
typically 10 to 30 years out. These aspirational goals may increase the risk of
a new power plant becoming a stranded asset long before the end of its otherwise
useful economic life, which is a risk that potential equity capital providers
may be unwilling to take. The difficulty in obtaining project equity financing
and the other factors identified above, may be adversely impacting the planning
and initial phases for the construction of new natural gas-fired power plants.

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Perhaps the most significant uncertainty relates to the policies of the current
U.S. Presidential administration. President Biden proposes to make the
electricity production in the U.S. carbon free by 2035 and to put the country on
the path to achieve net zero carbon emissions by 2050. These policy stances have
continued during the war in the Ukraine and the recent surge in oil prices as
the administration makes appeals to other countries to increase oil production
while domestic production is challenged by supply chain and labor issues and the
maintenance of restrictive regulations. Meanwhile, delays continue for the
construction of pipelines needed to transport natural gas to liquid natural gas
export facilities for shipment to Western Europe. Additionally, lenders, who
have become more wary of funding oil-related ventures as environmental, social
and governance ideas catch on in financial circles, are generally unwilling to
provide capital for energy projects to increase the domestic production and
transmission of oil and natural gas.

Accordingly, the net amount of electricity generation in the U.S. provided by
utility-scale wind and solar photovoltaic facilities continues to rise. Over the
last two years, the net generation has increased by almost 35%. Together, such
power facilities provided approximately 9%, 11% and 12% of the net amount of
electricity generated by utility-scale power facilities in 2019, 2020 and 2021,
respectively. In EIA’s 2022 reference case, net electricity generation from all
renewable power sources is expected to increase by more than 161% and represent
over 42% of such generation by 2050. Impetus for this growth is provided by both
public concerns about climate change and U.S. government subsidies.
Environmental activism has resulted in the passage of laws and the establishment
of regulations that discourage new fossil-fuel burning power plants and provide
income tax advantages that promote the growth of wind and solar power. Declines
in the amount of renewable power plant component and power storage costs and an
increase in the scale of energy storage capacity (i.e., battery farms) have also
occurred.

Over the next few years, EIA projects that new wind and photovoltaic solar
capacity will continue to be added to the utility-scale power fleet in the U.S.
at a brisk pace substantially attributable to declining equipment costs and the
availability of valuable tax credits. As these credits decline and then expire
early in the next decade as currently scheduled, the wind capacity additions are
expected to slow. Although the special tax incentives related to solar power
also expire, the continuing decline in the cost of solar power equipment is
predicted to sustain the growth of photovoltaic solar power generation
facilities.

Major advances in the safe combination of horizontal drilling techniques and
hydraulic fracturing led to the boom in natural gas supplies which have been
available generally at consistently low prices. However, reductions in
production levels during the pandemic, an increase in the amount of liquid
natural gas exports and current heat-wave temperatures in the South, among other
factors, are straining domestic natural gas supplies. As a result, the price of
natural gas in the U.S. has increased meaningfully since the beginning of the
calendar year and is predicted to go higher during the summer.

Nevertheless, we believe that relatively low natural gas prices will persist
over the long-term. Together with the lower operating costs of natural gas-fired
power plants, the higher energy generating efficiencies of modern gas turbines,
and the requirements for grid resiliency should sustain the demand for modern
combined cycle and simple cycle gas-fired power plants in the future. Natural
gas is relatively clean burning, cost-effective and reliable. New gas-fired
power plants incorporate major advances in gas-fired turbine technologies that
have provided increased power plant efficiencies while providing the quick
starting capabilities and the reliability that are necessary to balance the
inherent intermittencies of wind and solar power plants. We believe that its
benefits as a source of power are compelling, especially as a complement to the
deployment of wind and solar powered energy sources and that the future
long-term prospects for natural gas-fired power plant construction remain
generally favorable as natural gas continues to be the primary source for power
generation in our country. The abundant availability of inexpensive, less
carbon-intense and higher efficiency natural gas in the U.S. should continue to
be a significant factor in the economic assessment of future power generation
capacity additions although the pace of new opportunities emerging may be
restrained and the starts of awarded EPC projects may be delayed.

Throughout the U.S., the risk of electricity shortages is rising as
traditional power plants are being retired more quickly than they can
be replaced by renewable energy and battery storage. Power grids are feeling the
strain as the U.S. makes the historic transition from conventional power plants
fueled by coal and natural gas to cleaner forms of energy such as wind and solar
power, and aging nuclear plants are slated for retirement. Electric-grid
operators are warning that power-generating capacity is struggling to keep up
with demand, a gap that could lead to additional rolling blackouts during heat
waves or other peak periods as soon as this year.

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California’s grid operator recently stated that it anticipates a shortfall in
supplies this summer, especially if extreme heat, wildfires or delays in
bringing new power sources online exacerbate the constraints. The Midcontinent
Independent System Operator, or “MISO”, which oversees a large regional grid
spanning much of the Midwest, expects that capacity shortages may force it to
take emergency measures to meet summer demand and flagged the risk of outages.
Texas has experienced tight electricity supply conditions during the current
Southern heat wave. The challenge is that wind and solar farms do not produce
electricity at all times and need large batteries to store their output for
later use. While a large amount of battery storage is under development,
regional grid operators have lately warned that the pace may not be fast enough
to offset the closures of traditional power plants that can work around the
clock.

Accelerating the build-out of renewable energy sources and batteries has become
an especially difficult proposition amid supply-chain challenges and inflation.
For example, the highly publicized probe by the U.S. Commerce Department into
whether Chinese solar manufacturers are circumventing trade tariffs on solar
panels had the effect of halting imports of key components needed to build new
solar farms and effectively brought the U.S. solar industry to a temporary, but
virtual, standstill, although work at our solar energy project in Pennsylvania
continues.

In its 2022 Summer Reliability Assessment, the North American Electric
Reliability Corporation, which presents forward-looking evaluations of power
sufficiency, warned that an unprecedented array of risks that threaten
electricity generation output demand or demand spikes could imperil the
reliability of every North American bulk power system west of MISO this summer.
The power generation shortfalls have forced certain grid operators to react by
taking measures to keep aging fossil-fueled power plants online to assure
adequate supplies of electricity.

Additionally, solar and wind energy plant developers continue to confront the
problems caused by grid congestion, often unsuccessfully. Many of these projects
have been canceled because renewable plants need to be sited where the resources
are optimal, often in remote locations where the transmission systems are not
robust. The costs associated with the necessary grid upgrades may be
prohibitive.

In February 2022, there were record-breaking sales of six offshore wind leases
off the coasts of New York and New Jersey. This was followed by the federal
government’s defining up to eight additional areas for possible future offshore
wind development off the coast of Oregon and the Mid-Atlantic coast in April
2022. However, U.S. offshore wind projects progress inconsistently, facing
challenges in the areas of environmental and fishery impacts, grid connection
complexities, transmission planning and federal permitting processes. Further,
U.S. projects are confronted by shipping regulations that may limit the ability
of developers to replicate successful European erection models. Proponents of
clean energy also face political challenges from constituencies who oppose the
impacts to wildlife and the environment that may be caused by clean energy
infrastructure projects.

Renewed interest in nuclear power could result in the construction of new
nuclear powered, carbon-free, electricity generation stations in the U.S. that
would use smaller and more economical nuclear reactors. The deployment of small
modular reactors could mean lower construction and electricity costs through the
use of simpler power plant designs, standardized components and passive safety
measures. Such plants could be built in less time than larger plants, utilize
less space and represent a viable choice for reliable power to offset the
intermittencies of renewable power sources. The increase by the U.S. in its use
of nuclear power for electricity generation could have unfavorable effects on
the demand for new natural gas-fired and additional renewable energy facilities
in the future.

We believe that it is also important to note that the plans for certain natural
gas-fired power plant projects include the integration of hydrogen-burning
capabilities. While the plants will initially burn natural gas alone, it is
planned by the respective project owners that the plants will eventually burn a
mixture of natural gas and green hydrogen, thereby establishing power-generation
flexibility for these plants. We believe this is a winning combination that
provides inexpensive and efficient power, enhances grid reliability and
addresses clean-air concerns. The building of state-of-the-art power plants with
flex-fuel capability replaces coal-fired power plants in the short term with
relatively clean gas-fired electricity generation. Further, such additions to
the power generation fleet provide the potential for the plants to burn 100%
green hydrogen gas, which would provide both base load power and long duration
backup power, when the sun is not shining and the wind is not blowing, for
extended periods of time and without certain harmful air emissions.

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The foregoing discussion in our “Market Outlook” does focus on the state of the
domestic power market as the EPC services business of GPS provides the
predominant amount of our revenues. However, overseas power markets provide
important new power construction opportunities for us especially across Ireland
and the U.K.

While both of these countries are committed to the increase in energy
consumption sourced from wind and the sun on the pathway to net zero emissions,
there is a recognition that these sources of electrical power are inherently
variable. Other technologies will be required to support these power sources and
to provide electricity when power demands exceed the amount of electricity
supplied by these renewables. The existence of the necessary power reserve will
require conventional generation sources, typically natural gas-fired power
plants. APC was awarded the significant Kilroot project late in Fiscal 2022 to
build a clean burning natural gas-fired power plant in Northern Ireland so that
existing coal-fired power sources there can be shut down.

The U.K. usually holds auctions for power capacity about four years in advance
of the delivery date and another auction for a smaller amount of capacity around
a year before delivery. Evidence of the shifting power generation priorities in
the U.K. are reflected in the results for Britain’s auction to ensure enough
electricity capacity for 2022/23 that were released in February 2022. Capacity
cleared at a record high price. A total of nearly 5 gigawatts of capacity was
procured in this auction, with nearly 70% of the power associated with gas-fired
plants.

Last year, the Irish government issued a policy statement on the security of the
electricity supply in Ireland which confirms the requirement for the development
of new support technologies to deliver on its commitment to have 80% of the
country’s electricity generated from renewables by 2030. The report emphasizes
that this will require a combination of conventional generation (typically
powered by natural gas), interconnection to other jurisdictions, demand
flexibility and other technologies such as battery storage and generation from
renewable gases. The Irish government has approved that the development of new
conventional generation (including gas-fired and gasoil distillate-fired
generation) is a national priority and should be permitted and supported in
order to ensure the security of electricity supply while supporting the growth
of renewable electricity generation.

As noted above, APC recently entered into engineering and construction services
contracts with the ESB to construct three 65 MW aero-derivative gas turbine
flexible generation power plants in and around Dublin, Ireland. All three
projects are expected to operate intermittently during peak periods of
electricity demand and as back-up supply options when renewable electricity
generation is limited. A full notice to proceed has been received and project
activities have commenced.

Further, the Irish government has recognized that the successful development of
data centers in the country is a key aspect in promoting Ireland as a digital
economy hot-spot in Europe. The stewards of the electricity supply in Ireland
recognize that the large increase in electricity demand presented by the growth
of the data center industry represents an evolving, significant risk to the
security of the supply. Accordingly, guidelines have been published recently
with the intent to protect both electricity consumers and the security of supply
while continuing to allow data centers to connect to the electricity system.
Assessment criteria for applications of data centers to obtain grid connections
include, among other items, the ability of data center applicants to bring
onsite dispatchable power generation (and/or storage) equivalent to or greater
than their demand in order to support the security of supply. It is expected
that any dispatchable on-site generation that uses fossil fuel sources developed
by data center operators will use natural gas as the fuel source. Currently, APC
is completing a project to install natural gas-fired power generation for a
major data center in the Dublin area.

In our 2022 Annual Report, we identified that there are risks to our businesses,
particularly APC, related to the war in Ukraine. However, our APC business may
benefit from an increased focus by European Union countries on the import of
liquid natural gas as an alternative to piped supplies from Russia. The
construction of new conversion facilities, pipelines and power plants could
provide new construction opportunities for the Company.

APC is actively pursuing other new business opportunities in both the renewable
and support sectors with its existing and new clients. The governments of
Ireland and the U.K. have already made funds available to develop and support
specific projects. The engineering and construction teams of APC are engaged in
continuous discussions with particular stakeholders in certain of these other
projects and APC is confident that it will be part of their eventual execution.

Over the past few years, GPS has provided top management guidance and project
management expertise to APC as it completed its subcontract efforts for a
biomass-burning power plant and won the awards of the projects to build new
gas-fired power plant units near Belfast and Dublin. APC has provided project
management manpower to GPS on several of

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its EPC services contracts. These recent experiences have demonstrated that the
two companies can combine resources effectively. Considerations of the manner in
which GPS and APC will work together in the future are becoming more substantive
in view of emerging new business opportunities in the U.K. and Ireland, the
strength of the reputation of GPS for successfully completing large gas-fired
power plant projects in the U.S. and the growing recognition in the power
community in Ireland and the U.K. that APC is positioned and has the capability
to build larger and more complex power projects.

We are committed to the rational pursuit of new construction projects, including
those with overseas locations and unique deployments of power-generation
turbines, and the future growth of our revenues. This may result in additional
decisions to make investments in the development and/or ownership of new
projects. Because we believe in the strength of our balance sheet, we are
willing to consider certain opportunities that include reasonable and manageable
risks in order to assure the award of the related engineering, procurement,
construction or equipment installation services contracts to us.

The competitive landscape for our core EPC services business related to natural
gas-fired power plants in the U.S. has changed significantly over the last five
years. While the domestic market remains dynamic, we are moving into an era
where there may be fewer competitors for new gas-fired power plant EPC services
project opportunities. Several major competitors have exited the market for a
variety of reasons or have been acquired. Others have announced intentions to
avoid entering into fixed-price contracts. Nonetheless, the competition for new
utility-scale gas-fired power plant construction opportunities is fierce and
still includes multiple global firms. We believe that the Company has a
reputation as an accomplished, dependable and cost-effective provider of EPC and
other large project construction contracting services. With the proven ability
to deliver completed power facilities, particularly combined cycle, natural
gas-fired power plants, we are focused on expanding our position in the power
markets of the U.S., Ireland and the U.K. where we expect investments to be made
based on forecasts of electricity demand covering decades into the future. We
believe that our expectations are valid and that our plans for the future
continue to be based on reasonable assumptions.

Comparison of the Results of Operations for the Three Months Ended April 30,
2022 and 2021

We reported net income attributable to our stockholders of $7.5 million, or
$0.50 per diluted share, for the three months ended April 30, 2022. For the
comparable period of the prior year we reported net income attributable to our
stockholders of approximately $10.8 million, or $0.67 per diluted share.

The following schedule compares our operating results for the three months ended
April 30, 2022 and 2021 (dollars in thousands):

Three Months Ended April 30,
2022 2021 $ Change % Change

REVENUES

Power industry services $ 73,949$ 97,172$ (23,223) (23.9) %

Industrial fabrication and field services 22,501 26,658 (4,157) (15.6)
Telecommunications infrastructure services 3,827 2,511 1,316 52.4
Revenues

100,277 126,341 (26,064) (20.6)
COST OF REVENUES
Power industry services 59,035 78,669 (19,634) (25.0)

Industrial fabrication and field services 18,680 21,969 (3,289) (15.0)
Telecommunications infrastructure services 2,824 1,989

835 42.0
Cost of revenues 80,539 102,627 (22,088) (21.5)
GROSS PROFIT 19,738 23,714 (3,976) (16.8)
Selling, general and administrative expenses 10,575 9,892 683 6.9
INCOME FROM OPERATIONS 9,163 13,822 (4,659) (33.7)
Other income, net 595 712 (117) (16.4)
INCOME BEFORE INCOME TAXES 9,758 14,534 (4,776) (32.9)
Income tax expense (2,273) (3,768) 1,495 39.7
NET INCOME ATTRIBUTABLE TO
THE STOCKHOLDERS OF ARGAN, INC. $ 7,485$ 10,766$ (3,281) (30.5) %

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Revenues

Power Industry Services

The revenues of the power industry services segment, representing the businesses
of GPS and APC, decreased by 23.9%, or $23.2 million, to $73.9 million for the
three months ended April 30, 2022 compared with revenues of $97.2 million for
the three months ended April 30, 2021 as the quarterly construction activities
associated with the Guernsey Power Station project have passed peak levels and
APC completed its construction activities associated with the Teesside Renewable
Energy Project (“TeesREP”) last year. The reduction in revenues between the
quarters also was impacted by a slowdown in construction activities associated
with the Maple Hill solar energy project as it was adversely effected by the
disruption in the supply of photovoltaic panels that is expected to be
temporary. The revenues of this business segment represented approximately 73.7%
of consolidated revenues for the quarter ended April 30, 2022 and 76.9% of
consolidated revenues for the corresponding prior year quarter.

The primary driver for the revenues of this segment for the three months ended
April 30, 2021 were the revenues associated with the construction of the
Guernsey Power Station as the construction activities on this project were at
peak levels.

Industrial Fabrication and Field Services

The revenues of our industrial fabrication and field services segment
(representing the business of TRC) decreased by $4.2 million, or 15.6%, to $22.5
million for the three months ended April 30, 2022 compared to revenues of $26.7
million for the three months ended April 30, 2021 as the amount of pipe and
fabrication declined. For the three months ended April 30, 2022 and 2021, the
revenues of this segment represented 22.4% and 21.1% of consolidated revenues
for the corresponding periods.

TRC’s performance for the three-month period ended April 30, 2021 was
particularly strong as it reflected significant increases in revenues earned on
field services activities during the period, as well as increases in revenues
associated with pipe and vessel fabrication works. The major customers of TRC
include some of North America’s largest fertilizer producers, as well as other
chemical, mining, forest products, construction and energy companies with
plants, facilities and other sites located primarily in the southeastern region
of the U.S.

Telecommunications Infrastructure Services

The revenue results of this business segment (representing the business of SMC)
were $3.8 million for the three-month period ended April 30, 2022, an increase
of $1.3 million, or 52.4%, from the amount of revenues earned during the three
months ended April 30, 2021. The improvement in revenues between the quarters
related to increased project activities for both outside-premises and
inside-premises customers, including the customers of Lee Telecom, Inc., a
company acquired by SMC in December 2021.

Cost of Revenues

With the decrease in consolidated revenues for the three months ended April 30,
2022 compared with last year’s first quarter ended April 30, 2021, the
consolidated cost of revenues also decreased between the quarters. These costs
were $80.5 million and $102.6 million for the three month periods ended April
30, 2022 and 2021, respectively, representing a decrease of approximately 21.5%.

For the three-month period ended April 30, 2022, we reported a consolidated
gross profit of approximately $19.7 million which represented a gross
profit percentage of approximately 19.7% of corresponding consolidated revenues.
The gross profit percentages of corresponding revenues for the power industry
services, industrial services and the telecommunications infrastructure segments
were 20.2%, 17.0% and 26.2%, respectively, for the quarter ended April 30, 2022.

Our consolidated gross profit reported for the three-month period ended April
30, 2021 was $23.7 million, which represented a gross profit percentage of
approximately 18.8% of corresponding consolidated revenues. The gross profit
percentages of corresponding revenues for the power industry services,
industrial services and the telecommunications infrastructure segments were
19.0%, 17.6% and 20.8%, respectively, for the quarter ended April 30, 2021.

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Selling, General and Administrative Expenses

These costs were $10.6 million and $9.9 million for the three months ended April
30, 2022 and 2021, respectively, representing an increase of $0.7 million
between the quarters, or 6.9%, which occurred within each of our reporting
segments primary due to increased professional fees and stock compensation
expense.

Other Income

We reported other income, net, in the amount of $0.6 million for the three
months ended April 30, 2022 which included primarily earnings associated with
our solar fund investments. In April 2021, APC received a research and
development credit payment from the government of the U.K. related to certain
qualifying works performed on TeesREP during Fiscal 2019. Net of related costs,
the payment amount of $0.7 million, much like a grant, was included in other
income for the three months ended April 30, 2021.

Income Taxes

We incurred income tax expense for the three months ended April 30, 2022 in the
amount of approximately $2.3 million, which reflects an estimated annual
effective income tax rate of 23.7% for the current year, before discrete items.
This estimated tax rate differs from the statutory federal tax rate of 21% due
primarily to the unfavorable effects of state income taxes and estimated
permanent differences for the year including certain nondeductible executive
compensation and global intangible low taxed income (“GILTI”).

For the three months ended April 30, 2021, we reported income tax expense in the
amount of approximately $3.8 million, which reflected an estimated annual
effective income tax rate of approximately 25.1% for the year, before discrete
items, that was estimated at the time. This tax rate differed from the statutory
federal tax rate of 21% due primarily to the unfavorable effects of state income
taxes and permanent differences, including certain nondeductible executive
compensation and the non-deductible portions of the out-of-pocket travel and
living expenses incurred by the large numbers of our project and craft employees
who were working at offsite project locations.

Liquidity and Capital Resources as of April 30, 2022

At April 30 and January 31, 2022, our balances of cash and cash equivalents were
$192.3 million and $350.5 million, respectively, which represented a decrease of
$158.2 million. During the three months between these dates, our working capital
decreased by $22.9 million to $261.3 million as of April 30, 2022 from $284.3
million as of January 31, 2022.

The net amount of cash used in operating activities for the three months ended
April 30, 2022 was $39.7 million. Our net income for the three months ended
April 30, 2022, adjusted favorably by the net amount of non-cash income and
expense items, represented a source of cash in the total amount of $9.8 million.
However, reductions in the balance of contract liabilities and the combined
level of accounts payable and accrued expenses in the amounts of $20.9 million
and $15.2 million, respectively, represented uses of cash. Both of these
reductions related primarily to the decline in the construction activity of the
Guernsey Power Station project. Likewise, the increase in the amounts of
accounts receivable, contract assets, prepaid expenses and other assets, in the
total amount of $13.3 million, represented a use of cash during the period.

During the three months ended April 30, 2022, we also used cash to increase the
level of our short-term investments, which consist entirely of CDs issued by the
Bank, by $85.0 million. We also used $30.7 million cash in financing activities
during the three months ended April 30, 2022, including $27.1 million used to
repurchase shares of our common stock pursuant to our Share Repurchase Plan, and
$3.7 million used for the payment of regular cash dividends. As of April 30,
2022, there were no restrictions with respect to inter-company payments between
GPS, TRC, APC, SMC and the holding company. However, certain loans made by Argan
to APC have been determined to be uncollectible.

During the three months ended April 30, 2021, our balance of cash and cash
equivalents increased by a net amount of $30.0 million. The net amount of cash
provided by operating activities for the three months ended April 30, 2021 was
$17.3 million. Our net income for the period, adjusted favorably by the net
amount of non-cash income and expense items, represented a source of cash in the
total amount of $13.8 million. The sources of cash from operations also
included the temporary increase in the balance of contract liabilities
associated with projects at GPS and TRC in the amount of $27.5 million.

27

A reduction in the combined level of accounts payable and accrued expenses and
an increase in the amount of accounts receivable, in the respective amounts of
$21.6 million and $3.7 million, represented uses of cash for the three months
ended April 30, 2021.

Other primary sources of cash for the three months ended April 30, 2021 were the
net maturities of short-term investments and the proceeds associated with the
exercise of stock options in the amounts of $20.0 million and $1.0 million,
respectively. Non-operating activities also used cash during the three months
ended April 30, 2021, including the payment of a regular cash dividend in the
amount of $3.9 million, payments made to a solar energy investment company in
the amount of $3.5 million and capital expenditures in the amount of $0.8
million.

At April 30, 2022, most of our balance of cash and cash equivalents was invested
in a money market fund with most of its total assets invested in cash, U.S.Treasury obligations and repurchase agreements secured by U.S.Treasury
obligations. The major portion of our domestic operating bank account balances
are maintained with the Bank. We do maintain certain Euro-based bank accounts in
Ireland and certain pound sterling-based bank accounts in the U.K. in support of
the operations of APC.

The original term of our Credit Agreement with the Bank was scheduled to expire
on May 31, 2021. During April 2021, the Company and the Bank agreed to an
amendment to the Credit Agreement which extended the expiration date of the
Credit Agreement to May 31, 2024 and reduced the borrowing rate. The Credit
Agreement includes the following features, among others: a lending commitment of
$50.0 million including a revolving loan with interest at the 30 day LIBOR plus
1.6% (reduced from 2.0%), and an accordion feature which allows for an
additional commitment amount of $10.0 million, subject to certain conditions. We
may also use the borrowing ability to cover other credit instruments issued by
the Bank for our use in the ordinary course of business as defined by the Bank.
At April 30, 2022, we had no outstanding borrowings, however, the Bank has
issued letters of credit in the total outstanding amount of $21.1 million in
support of the activities of APC under new customer contracts. In connection
with the project development activities of the VIE, the Bank issued a letter of
credit, outside the scope of the Credit Agreement, in the approximate amount of
$3.4 million for which we have provided cash collateral. The Company expects to
amend the Credit Agreement again during Fiscal 2023 in order to replace LIBOR
with an equivalent benchmark rate. The Company does not expect that the change
will materially impact its consolidated financial statements.

We have pledged the majority of our assets to secure the financing arrangements.
The Bank’s consent is not required for acquisitions, divestitures, cash
dividends or significant investments as long as certain conditions are met. The
Credit Agreement requires that we comply with certain financial covenants at our
fiscal year-end and at each fiscal quarter-end, and includes other terms,
covenants and events of default that are customary for a credit facility of its
size and nature, including a requirement to achieve positive adjusted earnings
before interest, taxes, depreciation and amortization, as defined, over each
rolling twelve-month measurement period. At April 30, 2022 and January 31, 2022,
we were compliant with the covenants of the Credit Agreement.

In the normal course of business and for certain major projects, we may be
required to obtain surety or performance bonding, to provide parent company
guarantees, or to cause the issuance of letters of credit (or some combination
thereof) in order to provide performance assurances to clients on behalf of one
of our subsidiaries.

If our services under a guaranteed project would not be completed or would be
determined to have resulted in a material defect or other material deficiency,
then we could be responsible for monetary damages or other legal remedies. As is
typically required by any surety bond, we would be obligated to reimburse the
issuer of any surety bond provided on behalf of a subsidiary for any cash
payments made thereunder. The commitments under performance bonds generally end
concurrently with the expiration of the related contractual obligation. Not all
of our projects require bonding.

As of April 30, 2022, the value of the Company’s unsatisfied bonded performance
obligations, covering all of its subsidiaries, was approximately $187.0 million.
In addition, as of April 30, 2022, there were bonds outstanding in the aggregate
amount of approximately $1.1 million covering other risks including warranty
obligations related to completed activities; the majority of these bonds expire
at various dates over the next two years.

We have also provided a financial guarantee on behalf of GPS to an original
equipment manufacturer in the amount of $3.6 million to support project
developmental efforts. A liability was established for the estimated loss
related to this guarantee during Fiscal 2022.

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When sufficient information about claims related to our performance on projects
would be available and monetary damages or other costs or losses would be
determined to be probable, we would record such losses. As our subsidiaries are
wholly-owned, any actual liability related to contract performance is ordinarily
reflected in the financial statement account balances determined pursuant to the
Company’s accounting for contracts with customers. Any amounts that we may be
required to pay in excess of the estimated costs to complete contracts in
progress as of April 30, 2022 are not estimable.

Returns on money market instruments and certificates of deposit are currently
limited due to market conditions. With the desire to increase the amount of
return on its available cash, the Company has invested approximately $6.3
million in limited liability companies that makes equity investments in solar
energy projects that are eligible to receive energy tax credits. It is likely
that we will evaluate opportunities to make other solar energy investments of
this type in the future.

We believe that cash on hand, our cash equivalents, cash that will be provided
from the maturities of short-term investments and cash generated from our future
operations, with or without funds available under our Credit Agreement, will be
adequate to meet our general business needs in the foreseeable future. In
general, we maintain significant liquid capital in our consolidated balance
sheet to ensure the maintenance of our bonding capacity and to provide parent
company performance guarantees for EPC and other construction projects.

However, any significant future acquisition, investment or other unplanned cost
or cash requirement, may require us to raise additional funds through the
issuance of debt and/or equity securities. There can be no assurance that such
financing will be available on terms acceptable to us, or at all.

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

The table following immediately below presents the determinations of EBITDA for
the three months ended April 30, 2022 and 2021, respectively (amounts in
thousands).

Three Months Ended
April 30,
2022 2021
Net income, as reported $ 7,485$ 10,766
Income tax expense 2,273 3,768
Depreciation 809 882
Amortization of purchased intangible assets 166 228
EBITDA 10,733 15,644
EBITDA of the non-controlling interest – –

EBITDA attributable to the stockholders of Argan, Inc.$ 10,733$ 15,644

We believe that EBITDA is a meaningful presentation that enables us to assess
and compare our operating performance on a consistent basis by removing from our
operating results the impacts of our capital structure, the effects of the
accounting methods used to compute depreciation and amortization and the effects
of operating in different income tax jurisdictions. Further, we believe that
EBITDA is widely used by investors and analysts as a measure of performance.

However, as EBITDA is not a measure of performance calculated in accordance with
U.S. GAAP, we do not believe that this measure should be considered in isolation
from, or as a substitute for, the results of our operations presented in
accordance with U.S. GAAP that are included in our condensed consolidated
financial statements. In addition, our EBITDA does not necessarily represent
funds available for discretionary use and is not necessarily a measure of our
ability to fund our cash needs.

Critical Accounting Policies

Critical accounting policies are those related to the areas where we have made
what we consider to be particularly subjective or complex judgments in arriving
at estimates and where these estimates can significantly impact our financial
results under different assumptions and conditions. These estimates, judgments,
and assumptions affect the reported amounts of assets, liabilities and equity,
the disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting periods. We base our estimates on historical experience and various
other assumptions that we believe are reasonable under the circumstances, the
results of which

29

form the basis for making judgments about the carrying value of assets,
liabilities and equity that are not readily apparent from other sources. Actual
results and outcomes could differ from these estimates and assumptions. We do
periodically review these critical accounting policies and estimates with the
audit committee of our board of directors.

We consider the accounting policies related to revenue recognition on long-term
construction contracts; income tax reporting; the accounting for business
combinations; the subsequent valuation of goodwill, other indefinite-lived
assets and long-lived assets; and the financial reporting associated with any
significant claims or legal matters to be most critical to the understanding of
our financial position and results of operations, as well as the accounting and
reporting for special purpose entities including joint ventures and variable
interest entities. An expanded discussion of our critical accounting policies is
included in Item 7 of Part II of our Annual Report. During the three months
ended April 30, 2022, there have been no material changes in the way we apply
the critical accounting policies described therein.

Recently Issued Accounting Pronouncements

There are no recently issued accounting pronouncements that have not yet been
adopted that we consider material to our consolidated financial statements.

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