Array Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Array manufactures and supplies utility-scale solar tracking systems. The company reports Array Legacy Operations and STI Operations, acquired in January 2022.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $376.8 million | $300.6 million | Up 25% |
| Gross profit | $101.2 million | $26.6 million | Up $74.6 million |
| Gross margin | 26.9% | 8.8% | Up 18.1 percentage points |
| Operating income (loss) | $47.5 million | $(38.3) million | Improved $85.8 million |
| Net income (loss) | $26.1 million | $(25.9) million | Improved $52.1 million |
| Net income (loss) to common shareholders | $13.6 million | $(37.5) million | Basic and diluted EPS: $0.09 vs. $(0.25) |
| Operating cash flow | $45.8 million | $(50.1) million | Improved $95.9 million |
| Cash and cash equivalents | $147.8 million | $133.9 million at Dec. 31, 2022 | Up $13.9 million |
| Total debt, carrying amount | $740.2 million | $759.0 million at Dec. 31, 2022 | Down $18.8 million |
Revenue growth reflected higher shipments and average selling prices in Array Legacy Operations, and increased shipments, particularly in Brazil, for STI Operations. Legacy shipments rose 6% and average selling price rose 15%. Gross margin improvement in both segments was attributed to better pass-through pricing; Legacy also benefited from lower-than-expected logistics costs, described as a one-time benefit. Operating expenses fell 17%, primarily because prior-year acquisition and CEO-transition costs did not recur. Interest expense increased 37% to $9.5 million, mainly due to higher variable rates.
Revenue was $305.2 million for Array Legacy Operations and $71.6 million for STI Operations. The company recorded $17.6 million of bill-and-hold revenue from one customer. Remaining performance obligations were $571.5 million, which the company expected to recognize in full within the next 12 months.
Liquidity, debt and balance sheet
At March 31, 2023, current assets were $866.6 million and current liabilities were $470.6 million; management reported net working capital of $396.1 million. Cash included $33.6 million held outside the U.S. The company had $301.4 million outstanding under its term loan and no revolver borrowings; $159.6 million remained available under the $200 million revolving facility, subject to its terms. It also had an option, through June 30, 2023, to require preferred-stock investors to purchase additional securities for approximately $100 million.
Cash from operations benefited from net income and a $30.2 million increase in accounts payable, partly offset by a $23.3 million inventory increase and a $27.6 million decline in deferred revenue. Investing cash outflow was $3.9 million, primarily for property and equipment; financing cash outflow was $23.8 million, including term-loan and other-debt repayments. The company stated that it believes cash generation and available borrowing capacity will meet future liquidity needs, while noting macroeconomic and banking-system uncertainty.
Series A redeemable perpetual preferred stock had a carrying amount of $312.1 million and a $412.7 million liquidation preference at quarter-end. Preferred dividends and accretion were $12.5 million for the quarter, including $6.3 million of accrued dividends. Total liabilities were $1.275 billion. The company posted approximately $208.5 million of surety bonds and said these do not adversely affect liquidity or capital resources.
Material developments, outlook and risks
- Accounting corrections: Array corrected previously identified errors as an out-of-period adjustment, concluding the errors were not material to prior periods or the current quarter. The corrections included reclassifying capped calls and a put option as fair-value derivative assets rather than equity, with fair-value changes recognized in earnings. The opening-2023 correction increased derivative assets by $55.7 million, reduced deferred tax assets by $11.0 million, increased additional paid-in capital by $52.9 million, and reduced net income by $8.1 million. The filing also notes a $2.0 million goodwill correction.
- Internal controls: Management concluded disclosure controls were not effective as of March 31, 2023 because previously reported material weaknesses remained. Weaknesses included entity-level controls and controls over inventory, revenue recognition, receivables, financial reporting and consolidation, foreign currency, and STI systems and processes. Remediation efforts are ongoing; management said the financial statements nevertheless fairly present the company’s results in all material respects.
- Outlook: The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management expects higher interest expense for the remainder of 2023 than in 2022 due to variable rates. It expects inflationary pressures to persist near term and described price increases, productivity measures, supplier expansion, and overhead controls as mitigations.
- Market and operating risks: Solar-module supply constraints and U.S. trade investigations could delay customer projects and affect deliveries; the filing noted uncertainty around the Senate vote to repeal the presidential emergency declaration and the expected August 2023 USDOC final determinations. Other cited exposures include inflation, raw-material and logistics costs, supplier concentration, Ukraine-related sourcing and freight disruption, foreign-exchange movements, higher interest rates affecting customer financing, and uncertainty in the banking system.
- Legal matters: The company described consolidated securities class-action litigation and related derivative actions. It assessed the likelihood of a material loss as remote at this stage and recorded no material loss contingency.
- Fair-value sensitivity: Capped calls and the put option were Level 3 derivative assets; quarter-end fair values were $59.5 million and $3.8 million, respectively. Their valuations rely on significant unobservable assumptions.
Important facts for investors to verify
- Whether gross-margin gains persist after the disclosed one-time logistics benefit and as pricing, product mix, and costs change.
- Whether revenue growth, shipment volumes, and the $571.5 million remaining performance obligations convert as expected, including the effects of solar-project and module-supply delays.
- Progress in remediating material weaknesses and the effect of the control deficiencies on future reporting and audit assessments.
- Cash conversion and working-capital trends, particularly inventory, accounts payable, and deferred revenue, alongside debt service and higher borrowing costs.
- Developments in the securities and derivative accounting matters, including subsequent fair-value movements, the preferred-stock commitment deadline, and related dilution or dividend costs.