The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of July 31, 2009, and the results of operations for the three and six months ended July 31, 2009 and 2008, 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 the fiscal year ended January 31, 2009 that was filed with the Securities and Exchange Commission on April 15, 2009 (the "2009 Annual Report").
Cautionary Statement Regarding Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. We have made statements in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q that may constitute "forward-looking statements". The words "believe," "expect," "anticipate," "plan," "intend," "foresee," "should," "would," "could," or other similar expressions are intended to identify forward-looking statements. These forward-looking statements 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 net revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described in Item 1A of our 2009 Annual Report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove 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 Summary
Argan, Inc. (the "Company," "we," "us," or "our") conducts operations through our wholly-owned subsidiaries, Gemma Power Systems, LLC and affiliates ("GPS") that we acquired in December 2006, Vitarich Laboratories, Inc. ("VLI") that we acquired in August 2004, and Southern Maryland Cable, Inc. ("SMC") that we acquired in July 2003. Through GPS, we provide a full range of development, consulting, engineering, procurement, construction, commissioning, operations and maintenance services to the power generation and renewable energy markets for a wide range of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. Through VLI, we develop, manufacture and distribute premium nutritional products. Through SMC, we provide telecommunications infrastructure services including project management, construction and maintenance to the federal government, telecommunications and broadband service providers as well as electric utilities. Each of the wholly-owned subsidiaries represents a separate reportable segment - power industry services, nutritional products and telecommunications infrastructure services, respectively. Argan is a holding company with no operations other than its investments in GPS, VLI and SMC. At July 31, 2009, there were no restrictions with respect to inter-company payments from GPS, VLI and SMC to Argan.
Overview and Outlook
For the three months ended July 31, 2009, consolidated net revenues were $65.5 million which represented a decrease of $9.6 million, or 13%, from consolidated net revenues of $75.1 million for the three months ended July 31, 2008. The decrease in consolidated net revenues between the quarters was due primarily to a decrease of 15% in the net revenues of the power industry services business, which represented 91.4% of consolidated net revenues for the current quarter. The net revenues of the telecommunications infrastructure services business also decreased for the current quarter by 2% compared to the net revenues of the prior year quarter. The net revenues of the nutritional products business increased by 55% for the current quarter compared to the net revenues of the prior year period.
For the six months ended July 31, 2009, consolidated net revenues were $128.6 million which represented an increase of $5.1 million, or 4%, over consolidated net revenues of $123.5 million for the six months ended July 31, 2008. The increase in consolidated net revenues between the periods was due primarily to an increase of 3% in the net revenues of the power industry services business, which represented 91.6% of consolidated net revenues for the current period. The net revenues of the nutritional products and telecommunications infrastructure services businesses also increased for the current period, by 36% and 5%, respectively.

Income from operations increased for the three months ended July 31, 2009 by $2.1 million to $3.8 million. We reported income from operations of $1.7 million for the three months ended July 31, 2008; these results reflected impairment losses related to VLI that totaled $1.9 million. The improvement between the quarters also reflected an $828,000 reduction between the quarters in selling, general and administrative expenses. Income from operations increased by $4.6 million for the six months ended July 31, 2009 to $8.0 million. We reported income from operations of $3.4 million for the six months ended July 31, 2008; these results also reflected the impairment losses related to VLI that totaled $1.9 million. The improvement between the periods also reflected an increase in gross profit of $930,000 and a $1.6 million reduction between the periods in selling, general and administrative expenses.
Net income for the three months ended July 31, 2009 was $2.7 million, or $0.19 per diluted share. We reported net income of $806,000, or $0.07 per diluted share, for the corresponding quarter of the prior year. Net income for the six months ended July 31, 2009 was $5.7 million, or $0.41 per diluted share. We reported net income of $2.4 million, or $0.20 per diluted share, for the corresponding period of the prior year.
Our operating activities for the six months ended July 31, 2009 used $21.8 million in cash, due primarily to an $11.0 million increase in the balance of accounts receivable and an $8.2 million decrease in the balance of accounts payable and accrued expenses. During the current year, we reduced our long-term debt by $1.3 million to a balance of $2.9 million at July 31, 2009. This long-term debt amount represented 3.3% and 2.2% of total stockholders' equity and consolidated total assets as of July 31, 2009, respectively.
Primarily due to the scheduled performance of the work included in the contract backlog of GPS and GRP at July 31, 2009, we expect to report operating results for the remainder of the current fiscal year that are profitable and that include net cash provided by operations. However, current economic conditions in the United States, including a deep recession and severe disruptions in the credit markets, could adversely affect our results of operations in future periods, particularly if the adverse effects of the economic recession are prolonged or if government efforts to stabilize financial institutions, to restore order to credit markets, to stimulate spending and to arrest rising unemployment are not effective. The current instability in the financial markets may continue to make it difficult for certain of our customers, particularly for projects funded by private investment, to access the credit markets to obtain financing for new construction projects on satisfactory terms or at all. Difficulty in obtaining adequate financing due to the unprecedented disruption in the credit markets may significantly increase the rate at which our customers defer, delay or cancel proposed new construction projects. Such deferrals, delays or cancellations could have an adverse impact on our future operating results.
We anticipate that the political focus on energy independence and the negative environmental impact of fossil fuels may spur the development of alternative and renewable power facilities which should result in new power facility opportunities for us in the future. More than half of the states have adopted formal green-energy goals and federal support for infrastructure spending remains strong. An energy infrastructure renewal program is included in the federal economic stimulus package enacted earlier this year, making funds available for energy projects such as energy transmission and distribution systems and alternative energy power sources and including tax incentives to encourage capital investment in renewable energy sources.
We continue to observe interest in gas-fired generation as electric utilities and independent power producers look to diversify their generation options. We believe that the initiatives in many states to reduce emissions of carbon dioxide and other "greenhouse gases," and utilities' desire to fill demand for additional power prior to the completion of more sizeable or controversial projects, are also stimulating renewed demand for gas-fired power plants. Our two largest current projects include the construction of gas-fired electricity-generation plants. While it is unclear what the impact of current economic conditions might have on the timing or financing of such future projects, we expect that gas-fired power plants will continue to be an important component of long-term power generation development in the United States because these facilities are more efficient and produce fewer emissions than coal-fired power plants and we believe our capabilities and expertise will position us as a market leader for these projects.
In order to capitalize on emerging opportunities in the renewable energy market, we formed a company with a wind-energy development firm in June 2008 for the purpose of constructing wind-energy farms for project owners. The company, Gemma Renewable Power, LLC ("GRP"), was awarded a project to design and build the expansion of a wind farm in Illinois. During the current year, GPS achieved substantial completion of the construction of a biodiesel production plant in Texas, the fourth such project that we have completed within a two-year period, and are pursuing other alternative fuel-production opportunities. In summary, it is uncertain what impacts the current recession and financial/credit crisis in the United States may have on our business. We are continuously alert for effects of this crisis that may be impacting our business currently and any new developments that may affect us going forward. Moreover, the continuing global uncertainty and poor overall economic conditions may impair our visibility to an unusual degree. Current or deteriorating future conditions could potentially lead to the delay, curtailment or cancellation of proposed and existing projects, thus decreasing the overall demand for our services, adversely impacting our results of operations and weakening our financial condition.

Nevertheless, we remain cautiously optimistic about our long-term growth opportunities. We are focused on expanding our position in the growing power markets where we expect investments to be made based on forecasts of increasing electricity demand extending decades into the future. We believe that our expectations are reasonable and that our future plans are based on reasonable assumptions. However, such forward-looking statements, by their nature, involve risks and uncertainties, and they should be considered in conjunction with the risk factors included in Item 1A of the 2009 Annual Report. Letter of Intent with UNAMSCO
In August 2009, we announced the signing of a nonbinding letter of intent to purchase United American Steel Constructors, Inc. ("UNAMSCO"), a private company operating National Steel Constructors, LLC ("NSC"), a majority-owned subsidiary, and Peterson Beckner Industries ("PBI"), a company under common control. UNAMSCO reported annual consolidated net revenues of approximately $84 million and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) of approximately $19 million for its fiscal year ended December 31, 2008. These companies provide structural steel erection services for industrial and institutional clients in industries such as health care, sports stadiums/arenas, and chemical, refining, food processing and pharmaceutical plants. In addition to traditional construction activities, NSC and PBI also focus on the construction of facilities for air quality control systems, or scrubbers, that serve to reduce air emissions produced by traditional coal-fired power plants. The acquisition of UNAMSCO is subject to completion of due diligence, the negotiation of a definitive purchase agreement and the approval of our board of directors. We believe that UNAMSCO represents a complementary partner to our GPS subsidiary, and its addition will allow us to capitalize on new opportunities and to expand our market share in the engineering and construction industry, particularly the power sector.
Comparison of the Results of Operations for the Three Months Ended July 31, 2009 and 2008
The following schedule compares the results of our operations for the three months ended July 31, 2009 and 2008. Except where noted, the percentage amounts represent the percentage of net revenues for the corresponding quarter. As analyzed below the schedule, we reported net income of $2.7 million for the three months ended July 31, 2009, or $0.19 per diluted share. For the three months ended July 31, 2008, we reported net income of $806,000, or $0.07 per diluted share.

                                                        Three Months Ended July 31,
                                                  2009                              2008
Net revenues
Power industry services                $ 59,804,000           91.4 %     $ 70,639,000           94.1 %
Nutritional products                      3,452,000            5.3 %        2,226,000            2.9 %
Telecommunications infrastructure
services                                  2,199,000            3.3 %        2,233,000            3.0 %

Net revenues                             65,455,000          100.0 %       75,098,000          100.0 %

Cost of revenues **
Power industry services                  53,712,000           89.8 %       63,108,000           89.3 %
Nutritional products                      3,162,000           91.6 %        2,395,000          107.6 %
Telecommunications infrastructure
services                                  1,625,000           73.9 %        1,875,000           84.0 %

Cost of revenues                         58,499,000           89.4 %       67,378,000           89.7 %

Gross profit                              6,956,000           10.6 %        7,720,000           10.3 %
Selling, general and administrative
expenses                                  3,188,000            4.9 %        4,016,000            5.4 %
Impairment losses of VLI                          -              -          1,946,000            2.6 %

Income from operations                    3,768,000            5.7 %        1,758,000            2.3 %
Interest expense                            (52,000 )            *           (108,000 )            *
Investment income                            24,000              *            432,000              *
Equity in the earnings (loss) of
the unconsolidated subsidiary               408,000              *           (165,000 )            *

Income from operations before
income taxes                              4,148,000            6.3 %        1,917,000            2.6 %
Income tax expense                       (1,463,000 )         (2.2 )%      (1,111,000 )         (1.5 )%

Net income                             $  2,685,000            4.1 %     $    806,000            1.1 %

* Less than 1%.

** The cost of
revenues
percentage
amounts
represent
the
percentage
of net
revenues of
the
applicable
segment.

Net Revenues
Power Industry Services
The net revenues of the power industry services business decreased by $10.8 million, or 15%, to $59.8 million for the three months ended July 31, 2009 compared with net revenues of $70.6 million for the corresponding quarter of the prior year. The net revenues of this business represented 91.4% of consolidated net revenues for the quarter ended July 31, 2009. This business represented 94.1% of consolidated net revenues for the quarter ended July 31, 2008. Our energy-plant construction contract backlog was $346 million at July 31, 2009. The comparable construction contract backlog amount was $456 million at January 31, 2009.
The most significant customer of the power industry services business for the quarter ended July 31, 2009 was a large utility company that represented approximately 97.8% of the net revenues of this business segment for the current quarter, and represented approximately 89.3% of our consolidated net revenues for the current quarter. For this significant customer, we are constructing a natural gas-fired combined cycle power plant in California. Construction is expected to be completed in calendar year 2010. This customer represented 55.1% of the net revenues of this business segment for the quarter ended July 31, 2008, and represented 51.8% of our consolidated net revenues for the prior quarter. The other significant customer of the power industry services business for the quarter ended July 31, 2008 represented approximately 44.6% of the net revenues of this business and 42.0% of consolidated net revenues for the quarter, respectively. For this customer, we constructed two biofuels production facilities located in Texas, one of which was completed in the fourth quarter last year and the other was substantially completed in the current year. Nutritional Products
The net revenues of the nutritional products business increased by $1.2 million, or 55%, to $3.4 million for the three months ended July 31, 2009 compared with net revenues of $2.2 million for the corresponding period of the prior year. The net revenues of this business represented 5.3% of consolidated net revenues for the quarter ended July 31, 2009. This business represented 2.9% of consolidated net revenues for the quarter ended July 31, 2008.
The increase in net revenues between quarters was primarily due to the sale of products to new customers which represented 56.1% of the net revenues of this business for the current quarter. However, net revenues provided by the sale of products to other existing customers of VLI declined by 31% between the quarters. VLI is primarily a contract manufacturer of nutritional products. The ability to quickly replace lost customers or to increase the product offerings sold to existing customers is hampered by the long sales cycle inherent in our type of business. The length of time between the beginning of contract negotiation and the first sale to a new customer could exceed six months including extended periods of product testing and acceptance. However, business development efforts conducted by VLI have resulted in the addition of a number of new customers. The value of unfilled sales orders that we believe to be firm at July 31, 2009 was $2.3 million compared with a value of $1.5 million at January 31, 2009.
Telecommunications Infrastructure Services The net revenues of the telecommunications infrastructure services business were $2.2 million for both the three months ended July 31, 2009 and 2008. The net revenues of this business represented 3.3% of consolidated net revenues for the quarter ended July 31, 2009 and 3.0% of consolidated net revenues for the quarter ended July 31, 2008. Inside premises revenues represented 50.7% of this segment's business for both the current and prior year quarters including primarily services provided to government-sector customers. Outside premises customers represented 49.3% of this segment's business for the current and prior quarters including services provided primarily to utility firms.
The range of wiring services that we provide to our inside premises customers include cable and data rack installation; equipment room and telecom closet design and build-out; raceway design and installation; and cable identification, testing, labeling and documentation. Services provided to our outside plant customers include trenchless directional boring and other underground services, aerial cabling services, and the installation of buried cable and wire communication and electric lines.
Cost of Revenues
Due primarily to the decline in net revenues between the quarters, our overall gross profit decreased to $7.0 million for the three months ended July 31, 2009 from $7.7 million for the three months ended July 31, 2008, a decrease of 10% between the quarters. However, our overall gross profit percentage improved slightly to 10.6% for the current quarter compared with 10.3% for the corresponding quarter of the prior year which nearly offset the impact of the decline in net revenues between quarters.

The cost of revenues for the power industry services business of GPS decreased in the three months ended July 31, 2009 to $53.7 million from $63.1 million for the three months ended July 31, 2008 consistent with the decrease in net revenues between the quarters. The cost of revenues as a percentage of corresponding net revenues increased slightly to 89.8% for the current quarter from 89.3% for the second quarter of last year. Although the cost of revenues for the nutritional products business of VLI increased in the three-month period ended July 31, 2009 to $3.1 million from $2.4 million for the three months ended July 31, 2008, the cost of revenues percentage decreased to 91.6% of net revenues for the current quarter from a percentage of 107.6% for the corresponding quarter of the prior year.
In connection with the production of products pursuant to customer purchase orders received by VLI during the current quarter, the operations of VLI consumed a certain quantity of raw material inventory, the cost of which had been fully reserved in the prior year. Accordingly, we reversed a portion of its reserve for overstocked and obsolete inventory related to this item that reduced the cost of revenues of VLI by $118,000 for the three months ended July 31, 2009. The Company will continue to monitor the status of this new customer relationship including the volume of future purchase orders, and may reverse additional reserve amounts in future quarters as the relationship progresses. The amount of inventory reserve related to this raw material at July 31, 2009 was $1.2 million.
VLI's provision amount expensed for inventory obsolescence during the three months ended July 31, 2008 was approximately $103,000. Although the net revenues of the telecommunications infrastructure services business of SMC remained at the same level between the quarters, the cost of revenues declined to $1.6 million in the current quarter from $1.9 million in the prior quarter, resulting in a lower cost of revenues percentage in the current quarter. The cost of revenues percentages for the three months ended July 31, 2009 and 2008 were 73.9% and 84.0%, respectively, with the improvement primarily relating to the efficient performance of both inside and outside premises projects during the current quarter.
Certain sales-type taxes that are assessed by government authorities and collected from customers are included in the cost of revenues. Accordingly, these amounts are considered contract costs in the performance of percentage complete calculations and the determination of net revenues. The amounts of such costs were $2.5 million and $2.6 million for the three months ended July 31, 2009 and 2008, respectively.
Selling, General and Administrative Expenses The amount of selling, general and administrative expenses decreased by $828,000, or 21%, to $3.2 million for the current quarter from $4.0 million for the second quarter last year due to several factors. Legal fees declined by approximately $321,000 between the quarters ended July 31, 2009 and 2008. Amortization expense related to purchased intangible assets decreased by approximately $313,000 in the current quarter compared with the second quarter of last year as the amortization expense related to the contractual customer relationships of GPS was completed last year and the scheduled amortization of the intangible assets of VLI and SMC was eliminated with the recording of impairment losses related to these assets last year. Compensation expense related to stock options decreased by $85,000 for the current quarter compared with the same quarter one year ago. In addition, last year's selling, general and administrative expenses for VLI included a loss related to the disposal of fixed assets of approximately $113,000. VLI's selling, general and administrative expenses for the current quarter included bad debt expense in the amount of $125,000. For the quarter ended July 31, 2008, we had bad debt recoveries of $91,000.
Other Income and Expense
We reported investment income of $24,000 for the three months ended July 31, 2009 compared to investment income of $432,000 for the three months ended July 31, 2008. Our cash balances are invested in money market funds. The balance of cash and cash equivalents has declined by approximately $51.9 million over the last year from the balance at July 31, 2008, a decrease of 49.9%, as a series of construction projects have been completed during this period. Moreover, investment returns have also declined between the quarters as short-term rates of return have dropped substantially over the last year. Interest expense decreased to $52,000 for the current quarter from $108,000 in the corresponding quarter of last year as the overall level of debt between the years was reduced. Debt payments have reduced the total balance of debt (including current and noncurrent portions) to approximately $2.9 million at July 31, 2009 from approximately $5.4 million at July 31, 2008.
In June 2008, we announced that GPS had entered into a business partnership for the design and construction of wind-energy farms located in the United States and Canada. The business partners each own 50% of the new company, GRP, which is performing a construction project to expand a wind farm in Illinois. Our share of the earnings of GRP for the current quarter was approximately $408,000. A year ago, we recorded our share of the loss incurred by GRP during the quarter ended July 31, 2008 in the amount of $165,000.

Income Tax Expense
For the three months ended July 31, 2009, we incurred income tax expense of $1.5 million representing an effective income tax rate of 35.3%. The effective tax rate for the current quarter differed from the expected federal income tax rate of 34% due primarily to the effect of state income tax expense offset partially by the favorable tax effects of permanent differences including the domestic manufacturing deduction.
For the three months ended July 31, 2008, we incurred income tax expense of . . .