Argan (AGX) Risk Analysis

Our construction contracts frequently require that we obtain payment and/or 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. 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. 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 bonding available for our work and/or 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 or 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.

We may make additional opportunistic acquisitions and/or investments by identifying companies with significant potential for profitable growth and realizable synergies with one or more of our existing businesses. However, we may have more than one industrial focus depending on the opportunity and/or needs of our customers. Companies meeting our 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. 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 in a self-sustaining mode. However, we do attempt to integrate certain aspects to drive synergies and cost reductions, as well as to share best practices, processes and procedures. 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: - the diversion of management's attention from other important operational or financial matters;- the inability to retain or maintain the focus of key personnel of acquired companies;- the discovery of previously unidentified project costs or other liabilities;- unforeseen difficulties encountered in the maintenance of uniform standards, controls, procedures and policies, including an effective system of internal control over financial reporting; and - impairment losses related to acquired goodwill and other intangible assets. Further, we may conclude that the divestiture of a troubled or unrelated business will satisfy the best interests of our stockholders. There is risk that we would be unable to complete such a transaction with terms and timing that are acceptable for us, or at all. Any divesting transaction could also result in a material loss for us. In summary, integrating acquired companies may involve unique and significant risks. Our failure to overcome such risks could materially and adversely affect our business, financial condition and future results of operations, and could cause damage to our Company's reputation.

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 for which they believe they are not contractually liable. In other cases, project owners may withhold retention and/or contract payments that they believe they do not contractually owe us, or they believe offset amounts owed to them by us. They may even terminate the contract. We have been, 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 Item 3, Legal Proceedings). 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 could be named as parties to other types of lawsuits. Litigation can involve complex factual and legal questions, and proceedings may occur over several years. 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, cash flows and our reputation. 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.

The development of a power plant construction project is expensive. The 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 typically funded by external sources. Periodically, we provide financial support to new projects during their development phase to improve their viability and enhance our likelihood of securing the EPC contract for power plant construction. We have provided funding to special-purpose entities for gas-fired power plant projects during the development phase, leading to the return of our initial investment, the awarding of EPC contracts with authorization to start construction, and the receipt of success fees. While some of these initiatives have yielded positive results, others have not, resulting in the write-off of loan and interest balances and the loss of potential construction projects. In Fiscal 2025, we funded a loan to a special purpose entity in the amount of $5.0 million to support the development phase of a natural gas-fired power plant project (see Note 18 to the accompanying consolidated financial statements).

Our information 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. Techniques used to attempt to obtain unauthorized access to information systems change frequently, and the rapid development of AI poses new cybersecurity risks that we may not timely anticipate. 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. Furthermore, we are heavily reliant on computer, information and communications technology and related systems, some of which are hosted by third party providers. We may experience system availability disruptions. Unplanned interruptions could delay or prevent necessary operations. 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. Various privacy and security laws in the U.S. and abroad, including the General Data Protection Regulation ("GDPR") in the European Union, 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 from unauthorized disclosure. We believe that we have deployed industry-accepted security measures and technologies to securely maintain confidential and proprietary information retained within our information systems, including compliance with GDPR, specifically at APC. However, these measures and technologies may not adequately prevent unanticipated security breaches. There can be no assurance that our efforts will prevent these intrusions. 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 believe that our business represents a low value target for cyberextortionists 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 are a company with large balances of cash that could encourage bad actors to attempt to breach the security of our systems, particularly by using social engineering schemes. We do maintain a cybersecurity insurance policy to help protect ourselves from various types of losses relating to computer security breaches; however, it may not cover all types of breaches or a meaningful portion of any loss incurred. As previously disclosed, we were targeted by a complex criminal scheme in Fiscal 2024, which resulted in fraudulently-induced outbound wire transfers to a third-party account (see Note 18 to the accompanying consolidated financial statements). We are unaware of any other significant security breaches at any of our business locations. That does not suggest that we may not be victimized by an additional breach in the future. Any significant future 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.

The use of artificial intelligence, machine learning, data science, and similar technologies (collectively, "AI") in our business presents risks and challenges that could have a material adverse effect on our business, results of operations, and financial condition. Currently, our use of AI is limited, but we may expand its integration into our business processes and solutions in the future. AI, including third-party AI tools, may be used in areas such as knowledge retention, risk detection, and virtual assistance. While these technologies have the potential to enhance efficiency and decision-making, they also pose significant risks, including reliability issues, data security concerns, regulatory challenges, and unintended consequences. AI algorithms may be flawed or biased. As a result, the content, analysis, or recommendations generated by these tools may be inaccurate, incomplete, or misleading. Unauthorized or improper use of AI tools-whether by employees, vendors, or third parties-could lead to breaches of confidentiality, data privacy violations, or the loss of proprietary information, potentially resulting in competitive harm, reputational damage, regulatory investigations, and legal liability. Additionally, we may have limited control or visibility into how third-party AI tools and AI-powered features in third-party products process and protect our data, even where we have sought contractual protections. As our reliance on AI evolves, we will continue to assess and mitigate these risks accordingly. Finally, our competitors may adopt and implement AI technologies more effectively or rapidly than we do, potentially giving them a competitive advantage. If we are unable to adopt and integrate AI tools in a cost-effective and timely manner, our business, financial condition, and results of operations could be materially and adversely affected.

The competitive landscape in the EPC services market for natural gas-fired power plants was altered several years ago as certain 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 borne by contractors. However, the market remains dynamic, and remaining competitors include committed multi-billion-dollar companies with thousands of employees. As utilities and developers seek to expand generation capacity, more firms may re-enter the market, either by restarting their EPC operations, expanding their capabilities, or shifting their contracting strategies to re-engage in bidding. Competing effectively in our market requires substantial financial resources, the availability of skilled personnel and equipment when needed and the effective use of technology. Meaningful competition is expected to continue in the domestic market, and could increase in the Irish and U.K markets, 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 to win the awards of 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 business is subject to overseas economic and political conditions that change for reasons which are beyond our control. Such changes may have unfavorable consequences for us. Operating in the European marketplace, which for us exists primarily in Ireland and the U.K., may expose us to a number of risks including: - abrupt changes in domestic and/or foreign government policies, laws, treaties (including those impacting trade), regulations or leadership;- embargoes or other trade restrictions, including sanctions;- restrictions on currency movement;- tax or tariff increases;- currency exchange rate fluctuations;- changes in labor conditions and difficulties in staffing and managing overseas operations; and - other social, political and economic instability. Our level of exposure to these risks will vary on each significant project we perform overseas, 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 could cause losses reflected at the consolidated level.

Natural disasters, such as hurricanes, tornadoes, blizzards, floods and other adverse weather conditions; or other catastrophic events such as fires, public health crises, pandemics, geopolitical conflicts, terrorism and civil disturbances 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 facility for indefinite periods of time, disrupt our product supply chain or could cause our customers to delay or cancel projects. To the extent any of these events occur, our operations and financial results could be adversely affected. The adverse effects of the war in Ukraine spread globally. The prolonged disruption by Russia of the supply and prices of oil and natural gas provided to Western European nations adversely affected the economies of those countries. Western European nations were forced to search for alternative supplies of oil and natural gas at higher prices or through more complicated transit routes, further disrupting global supply chains. Many resorted to seeking alternative energy sources, such as liquefied natural gas ("LNG"), which involves infrastructure challenges and elevated costs. In addition to energy supply disruptions, activities conducted by Yemen-based terrorist groups significantly endangered the key shipping route between the Red Sea and the Indian Ocean. These actions led to rerouting shipping vessels, longer transit times, and increased freight costs, compounding global supply chain challenges. We have protections in our contracts with major customers that provide certain relief that helps to mitigate certain financial risks. However, the effectiveness of these protections may be limited by factors including the financial strength of the customer. The extent to which natural disasters, human-made disasters or other catastrophic events could harm us depends on the impact on our customers, supply chains, labor forces and numerous other evolving factors.

President Trump has proposed heavy tariffs on imports from several nations, including a significant levy on imports from Canada, Mexico and China. These measures are expected to increase the cost of essential construction materials, such as steel and aluminum, which are critical components in power plant construction and often integral components to the industrial construction projects we build. Tariff measures may also cause import delays, increasing lead times necessary for materials to arrive at our construction sites. The resulting rise in material costs and delivery delays could lead to higher overall project expenses and changes to project timelines, as companies may need to seek alternative suppliers or renegotiate contracts. The uncertainty surrounding trade policies may deter investment in new power plant or industrial construction projects, as stakeholders assess the financial viability amid fluctuating costs. As trade negotiations continue and new policies are introduced, the tariff situation remains fluid, adding to the unpredictability of material costs and supply chain stability. These factors collectively pose a risk to our business operations, potentially affecting project timelines, budgets, and profitability.