Array Technologies, Inc. — Q2 2023 Form 10-Q
Business and period. Array manufactures and supplies utility-scale solar tracking systems. This unaudited filing covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Results include Array Legacy Operations and STI Operations, acquired in January 2022.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $507.7 million | $419.9 million | $884.5 million | $720.5 million |
| Gross profit | $150.0 million | $39.9 million | $251.2 million | $66.5 million |
| Gross margin | 29.6% | 9.5% | 28.4% | 9.2% |
| Operating income (loss) | $96.2 million | $(13.3) million | $143.7 million | $(51.7) million |
| Net income (loss) | $64.8 million | $(5.0) million | $90.9 million | $(31.0) million |
| Net income (loss) to common shareholders | $52.0 million | $(17.2) million | $65.7 million | $(54.7) million |
| Diluted EPS | $0.34 | $(0.11) | $0.43 | $(0.37) |
- Revenue and margins: Q2 revenue increased 21%; six-month revenue rose 23%. STI’s higher shipment volume—particularly in Brazil—was a major growth driver. Q2 Array Legacy revenue declined 1%, as lower shipped megawatts were largely offset by higher average selling prices. Management attributed stronger gross margins across both segments to improved pass-through pricing, lower input and logistics costs, and product mix.
- Cash flow: Operating activities provided $66.4 million in the first half, versus $60.8 million used in the prior-year period. Cash at June 30 was $156.0 million, up $22.1 million from year-end. Working capital movements included an $81.0 million increase in receivables and a $64.1 million decrease in deferred revenue.
- Debt and liquidity: Total debt principal was $765.7 million: $290.3 million on the term loan, $425.0 million of 1.00% convertible notes due 2028, and $50.4 million of other debt. The revolver had no borrowings and $173.3 million available. The term loan’s effective interest rate was 9.41%. Net working capital was $473.3 million. Series A preferred stock had a $419.3 million liquidation preference and $19.3 million of accrued, unpaid dividends.
- Other indicators: Remaining performance obligations were $452.7 million, with the company expecting to recognize all of them within 12 months. The company posted $220.9 million in surety bonds and stated these do not adversely affect liquidity or capital resources.
Material changes and unusual items
- Gross profit rose substantially year over year, while first-half cost of revenue declined 3% despite revenue growth. The STI segment’s first-half revenue increased 91%; Array Legacy revenue increased 9%.
- First-half interest expense was $19.6 million, up from $15.0 million. General and administrative expense was $78.4 million, up 5% year over year for the first half. The filing states management expects interest expense to be higher for the remainder of 2023 than in 2022.
- In Q1 2023, the company corrected prior accounting for capped-call and put-option arrangements, recording derivative assets and fair-value changes. It characterized the cumulative out-of-period adjustment as not material to previously issued statements or the current interim statements. The capped calls’ June 30 fair value was $64.0 million; changes depend on significant unobservable valuation assumptions.
- The Series A put option expired June 30, 2023. Preferred dividends and accretion reduced income attributable to common shareholders by $12.8 million in Q2 and $25.3 million in the first half.
Outlook, risks, and contingencies
- No quantified revenue, earnings, or cash-flow guidance is provided. Management said it believes operating cash flows and available borrowing capacity will be sufficient for future liquidity needs.
- Management cited persistent near-term inflation, European material sourcing and logistics effects related to the Ukraine conflict, and solar-project delays associated with U.S. solar-module trade investigations and import-compliance uncertainty. The company does not sell solar modules, but project delays may affect its deliveries and sales.
- Other stated risks include customer financing constraints from higher interest rates, raw-material and component cost volatility, dependence on limited or single-source suppliers, customer concentration or nonpayment, competition, policy and incentive changes, and substantial indebtedness.
- Financial reporting controls: Management concluded disclosure controls were not effective at June 30, 2023 because previously reported material weaknesses remained. Areas included the control environment and monitoring, inventory, revenue recognition, receivables, consolidation and business combinations, foreign currency, and STI’s IT and accounting controls. Management described remediation efforts as ongoing and requiring sustained testing.
- Legal matter: A securities class action was dismissed with prejudice on July 5, 2023; plaintiffs appealed on August 4. Management assessed the likelihood of material loss as remote and recorded no material loss contingency. Related derivative cases were stayed pending developments in the class action.
- Comparability note: The filing’s MD&A says Q2 interest expense decreased year over year, but the statements of operations report $10.1 million versus $8.0 million. The first-half statements also show an increase. This appears inconsistent and merits confirmation.
Investor verification priorities
- Confirm the sustainability of the sharp gross-margin recovery, including the contribution of pricing, input-cost relief, mix, and STI shipments.
- Track collections and working-capital conversion, particularly receivables, deferred revenue, and the resulting operating cash flow.
- Review debt costs, repayment requirements, revolver availability, and the economics of preferred-stock dividends and accretion.
- Monitor remediation and independent testing of the disclosed material weaknesses, including any further restatements or reporting delays.
- Verify the interest-expense MD&A discrepancy and follow the appeal, solar-module trade developments, and project-delay effects.