Array Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Array manufactures and supplies utility-scale solar tracking systems and related products. All financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $350.4 million | $515.0 million | $1,234.9 million | $1,235.5 million |
| Gross profit | $87.4 million | $76.6 million | $331.3 million | $135.8 million |
| Gross margin | 25% | 15% | 27% | 11% |
| Operating income (loss) | $40.2 million | $17.2 million | $183.9 million | $(34.5) million |
| Net income | $23.2 million | $40.6 million | $114.2 million | $9.7 million |
| Net income (loss) to common shareholders | $10.1 million | $28.4 million | $75.8 million | $(26.4) million |
| Basic and diluted EPS | $0.07 | $0.19 | $0.50 | $(0.18) |
Cash flow: For the first nine months, operating activities provided $138.0 million, compared with $44.0 million in 2022. Investing activities used $11.6 million, primarily for capital expenditures. Financing activities used $84.4 million, including $73.2 million of term-loan principal payments. Cash increased by $40.1 million to $174.0 million.
Liquidity and debt: At September 30, cash was $174.0 million, net working capital was $462.6 million, and the company reported $175.1 million available under its $200 million revolving facility, with no revolver borrowings. Debt principal totaled $719.5 million: $239.3 million under the term loan, $425.0 million of 1.00% convertible notes due 2028, and $55.3 million of other debt. The term-loan effective interest rate was 9.95%.
Other balance-sheet items: Total assets were $1.779 billion and total liabilities were $1.162 billion. Series A redeemable preferred stock had a $337.9 million carrying amount and a $493.1 million liquidation preference; $26.0 million of preferred dividends were accrued and unpaid at quarter-end.
Changes versus the comparable period
- Q3 revenue fell 32%, mainly because Array Legacy Operations shipments declined amid customer project delays; management also cited lower average selling prices. Nine-month revenue was essentially flat: STI growth of 43% offset a 10% decline in Array Legacy Operations.
- Gross margin improved substantially in both periods. Management attributed the gains to improved pricing pass-through, lower raw-material and logistics costs, and a more favorable mix, including fewer lower-margin construction services.
- Q3 net income declined 43%, reflecting lower revenue and the absence of a $42.8 million legal-settlement gain recognized in Q3 2022. Nine-month net income rose to $114.2 million from $9.7 million, with higher gross profit and lower operating expenses partly offset by higher taxes and interest expense.
- Interest expense rose 48% in Q3 and 49% for the nine-month period, mainly due to higher variable rates and accelerated non-cash interest associated with unscheduled term-loan repayments.
Outlook, risks and unusual items
- Management said operating cash flows and available borrowing capacity are expected to be sufficient for future liquidity needs. It expects interest expense to remain higher for the rest of 2023 than in 2022. The filing provides no numerical revenue or earnings guidance.
- Demand and delivery timing remain exposed to customer project delays, customer financing costs and interest rates, solar-module supply constraints and trade actions, tariffs, raw-material and component costs, supplier concentration, and geopolitical disruption. Management noted inflationary pressures may persist and described selective price increases, productivity efforts, supplier diversification and cost containment.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023 because previously reported material weaknesses in internal control over financial reporting remained. Areas include inventory, revenue recognition, receivables, financial reporting and consolidation, foreign currency, and STI controls. Management described remediation efforts; sustained testing and validation remain necessary.
- The company corrected prior accounting errors in Q1 2023, concluding the cumulative adjustment was not material to the affected prior statements or Q1 2023. The correction resulted in a $64.1 million derivative asset at September 30, 2023, including capped calls; fair value relies on Level 3 inputs, particularly volatility assumptions. The filing also describes a prior goodwill and inventory correction related to the STI acquisition.
- A securities class action was dismissed with prejudice, but plaintiffs appealed; related derivative actions remain stayed during the appeal. Management considered material loss remote and recorded no material loss contingency. The company also had $217.6 million of surety bonds outstanding, which it said did not adversely affect liquidity or capital resources.
- Solar-module trade proceedings and an October 2023 investigation into aluminum extrusions could affect customer projects, component costs or supply. Management said the ultimate impacts remain uncertain.
Important facts for investors to verify
- Whether shipment volumes and customer project delays improve, particularly in Array Legacy Operations, and whether gross-margin gains are sustainable.
- Debt repayment progress, variable-rate borrowing costs, revolver availability, and cash conversion as deferred revenue and working-capital balances change.
- Progress in remediating the disclosed material weaknesses, especially in STI, revenue recognition, inventory and foreign-currency reporting.
- Developments in the securities appeal and related derivative cases, as well as solar trade actions and aluminum-extrusion duties.
- Preferred-stock dividend accruals and obligations, and the valuation assumptions for the Level 3 capped-call derivative asset.