Array Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Array manufactures and supplies solar tracking systems. Results include Soluciones Técnicas Integrales (STI), acquired January 11, 2022; the acquisition expanded the company’s international presence and created two reportable segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $424.9 million | $196.5 million | $725.5 million | $444.8 million |
| Gross profit | $47.4 million | $20.5 million | $74.0 million | $66.7 million |
| Gross margin | 11% | 10% | 10% | 15% |
| Operating income (loss) | $(6.8) million | $(0.6) million | $(39.0) million | $14.8 million |
| Net income (loss) | $(2.8) million | $(5.5) million | $(24.8) million | $(0.9) million |
| Net loss to common shareholders | $(15.0) million | $(5.5) million | $(48.6) million | $(0.9) million |
- Q2 revenue increased 116%; Array Legacy revenue rose 79%, with shipped megawatts up approximately 54% and average selling price up 16%. STI contributed $72.7 million of Q2 revenue.
- For the first half, revenue increased 63%; excluding STI, it grew 36%. Legacy megawatts shipped increased approximately 17%, and average selling price rose 16%.
- Q2 gross margin improved year over year, but first-half margin fell to 10% from 15%. Management attributed the first-half decline to commodity and logistics cost increases that were not fully offset by pricing, including older contracts.
- Q2 net loss was smaller than a year earlier, partly reflecting a $14.2 million income tax benefit. First-half net loss widened; acquisition-related amortization, higher G&A and weaker legacy gross margin weighed on results. Preferred dividends and accretion further increased the loss attributable to common shareholders.
Cash flow, liquidity and debt
- Operating cash use was $60.8 million in the first half, versus $134.1 million a year earlier. Working-capital demands included increases in accounts receivable of $111.6 million and inventory of $77.2 million, partly offset by higher accounts payable.
- Investing cash use was $377.7 million, primarily for the STI acquisition. Financing provided $122.7 million. Cash declined $316.6 million during the half to $51.0 million at June 30.
- Net working capital was $392.7 million. The revolving facility had $96.7 million of stated availability, but the company cautioned that debt covenants could limit its ability to draw funds and that it did not expect to maximize availability.
- Debt included $425 million principal of 1.00% convertible notes due 2028, a $324.6 million term loan, $68.0 million drawn on the revolving facility, and debt assumed with STI. Balance-sheet current and long-term debt totaled approximately $845.1 million, net of applicable discounts and issuance costs.
- Series A redeemable perpetual preferred stock had a $413.0 million liquidation preference at June 30. Dividends were accruing rather than being paid in cash; the stated accrued rate was 6.25%.
Outlook, risks and notable items
- Management stated it expected adequate liquidity for the next 12 months, using operating cash flow and, if needed, available financing. It provided no specific financial guidance in the supplied filing text.
- Remaining performance obligations were $477 million, with the company expecting to recognize all of them within the next 12 months.
- Management cited COVID-related supply-chain and logistics constraints, elevated raw-material and freight costs, labor and delivery delays, inflation, and the Ukraine conflict as risks to margins, cash generation and project timing. The company reported that U.S. solar-module project delays had occurred during the Department of Commerce investigation; following a 24-month suspension of certain duties, it had not observed a material decrease in customer demand.
- STI was acquired for total consideration of $610.8 million, including $410.5 million cash and $200.2 million in stock. The preliminary purchase-price allocation included $335.4 million of goodwill and $318.4 million of identifiable intangible assets; valuation remained subject to adjustment.
- On July 15, 2022, after quarter-end, Array settled its Nextracker litigation and received $42.8 million on August 4. A separate securities class action and related derivative litigation remained unresolved; the company reported no material loss accrual and considered a material loss remote at that time.
- Disclosure controls and procedures were reported ineffective as of June 30 due to continuing material weaknesses in the control environment and monitoring, inventory, revenue recognition and accounts receivable. Management was pursuing remediation. STI’s internal controls were expected to be excluded from the company’s 2022 year-end assessment.
Important facts for investors to verify
- Whether gross margins recover as higher input costs are passed through and supply-chain delays ease.
- Whether working-capital needs, operating cash use and constrained revolver availability affect liquidity or covenant headroom.
- How STI performs against acquisition assumptions, and whether its preliminary goodwill and intangible-asset valuations change.
- The timing and financial effect of preferred-stock dividends, convertible-note dilution or repayment, and variable-rate debt costs.
- Progress in remediating material weaknesses, the status of securities litigation, and the impact of the $42.8 million post-quarter settlement.