Array Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The financial statements are for ATI Intermediate Holdings, LLC, which converted to Array Technologies, Inc. on October 14, 2020. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context and financial performance
Array manufactures and supplies solar tracking systems and related products. Its revenue is primarily from project-specific tracker systems, with most system revenue recognized over time. Management says customer deliveries shifted toward the first half of 2020, partly because customers advanced orders to benefit from the investment tax credit (ITC).
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $139.5 | $197.8 | $692.1 | $423.2 |
| Gross profit | $26.7 | $46.9 | $167.3 | $90.2 |
| Gross margin | 19.2% | 23.7% | 24.2% | 21.3% |
| Operating income (loss) | $(5.1) | $28.3 | $97.5 | $42.9 |
| Net income (loss) | $(7.2) | $18.2 | $68.8 | $13.0 |
| Adjusted EBITDA (non-GAAP) | $16.6 | $39.3 | $140.5 | $71.8 |
| Adjusted net income (non-GAAP) | $8.8 | $26.1 | $93.4 | $43.2 |
Q3 revenue fell 29% year over year as megawatts shipped declined approximately 28%. Nine-month revenue rose 64% as megawatts shipped increased approximately 63%. Q3 gross margin declined on higher logistics costs as a share of revenue and less favorable project mix; nine-month margin improved on project mix and supply-chain and logistics efficiencies.
Q3 operating results included $13.6 million of contingent-consideration expense, primarily from remeasuring the earn-out liability using an anticipated IPO valuation. This materially affected reported operating income and net income. The nine-month tax expense also reflects a $6.6 million tax benefit from carrying back net operating losses under the CARES Act.
Cash flow, liquidity and debt
- Operating cash flow: Used $226.5 million in the first nine months of 2020, compared with $11.5 million used in 2019. Management attributed the 2020 outflow mainly to payments to suppliers for products customers had prepaid in 2019 but that were shipped in 2020; deferred revenue fell $284.0 million.
- Investing and financing cash flow: Investing activities used $0.6 million. Financing activities used $107.0 million, including repayment of $57.7 million of term-loan principal and $45.6 million of related-party loans.
- September 30 liquidity: Cash was $27.1 million, working capital was $117.9 million, and the company reported $68.9 million available under its then-existing asset-based revolver, net of letters of credit. Cash declined from $310.3 million at December 31, 2019; restricted cash declined from $51.0 million to zero.
- Debt and subsequent financing: The prior term loan was repaid in February 2020 and the related-party loan in July. On October 14, the company entered into a new $575 million term loan and $150 million revolving facility. It used $105 million of IPO proceeds to reduce the term loan to $470 million; the filing also says $20 million of IPO proceeds repaid the new revolving facility. The filing describes approximately $437 million of pro forma net indebtedness after debt discount and issuance costs. The new facilities are secured and include restrictive covenants and a springing leverage covenant on the revolver.
On October 14, 2020, the company also made a $589 million special distribution to its parent, funded with proceeds from the new credit facility and cash on hand. The IPO closed October 19, raising $140.2 million net. The filing anticipates higher interest expense under the new debt facility.
Outlook, risks and unusual items
- There is no quantitative earnings or revenue guidance in the filing. At September 30, remaining performance obligations were $227.0 million, all expected to be recognized within the next 12 months.
- Management said operations had continued without interruption and with normal delivery turnaround despite COVID-19, but cautioned that further effects on operations, suppliers, demand and cash flows were uncertain.
- Demand and results are exposed to changes in solar incentives and regulation, project financing and electricity prices, trade restrictions and tariffs, commodity prices (particularly steel and aluminum), supply-chain disruption, and customer concentration. The five largest customers represented 45.9% of nine-month revenue; the largest represented 14.3%.
- The earn-out liability was valued at $15.9 million at September 30, with a $25 million maximum. Management expected a further fair-value increase in Q4 based on the stock’s trading price; a $9.1 million earn-out payment was made in October following the IPO and special distribution. The separate Tax Receivable Agreement liability was $18.3 million, with estimated undiscounted future payments of $25.3 million.
- Disclosure controls were not effective at September 30 due to material weaknesses involving the financial close, deferred and unbilled revenue reconciliation, and inventory cut-off and pricing. Remediation was underway, but not yet complete.
- The company disclosed ongoing trade-secret and related litigation against a competitor; management did not believe other current claims would have a material adverse effect. It also identified risks from its new debt burden, controlled-company status, public-company costs, and execution of its growth plans.
Most important facts for investors to verify
- Whether Q3’s shipment and revenue decline reflects timing alone, and how much deliveries were pulled forward for the ITC.
- Whether gross margins recover from Q3 levels and whether logistics and project mix remain adverse.
- How operating cash flow evolves as prepaid orders and deferred revenue are delivered, and whether liquidity remains adequate after the special distribution.
- The ongoing interest expense, covenant headroom and leverage implications of the $470 million term loan and the new revolving facility.
- Whether the material weaknesses are remediated and whether financial reporting controls operate effectively over sustained reporting periods.
- The actual cash cost and fair-value changes of the earn-out and Tax Receivable Agreement, and the timing and conversion of the $227 million performance-obligation balance into revenue.