Array Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Array manufactures and supplies solar tracking systems; nearly all revenue in the first nine months came from U.S. customers.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $192.1 million | $139.5 million | $640.8 million | $692.1 million |
| Gross profit / margin | $9.3 million / 4.8% | $26.7 million / 19.2% | $79.9 million / 12.5% | $167.3 million / 24.2% |
| Operating income (loss) | $(16.1) million | $(5.1) million | $2.6 million | $97.5 million |
| Net income (loss) | $(25.6) million | $(7.2) million | $(22.7) million | $68.8 million |
| Net loss to common shareholders / diluted EPS | $(31.0) million / $(0.24) | $(7.2) million / $(0.06) | $(28.2) million / $(0.22) | $68.8 million / $0.57 |
- Q3 revenue rose 38%, while cost of revenue grew 62%; management attributed margin compression principally to higher commodity and logistics costs. Megawatts delivered increased approximately 76% in Q3.
- Nine-month revenue declined 7% despite approximately 14% more megawatts delivered, primarily because higher module wattages reduced average selling prices. Gross margin fell 11.7 percentage points.
- Q3 general and administrative expense increased 56% year over year, to $18.5 million, reflecting headcount, professional fees and public-company costs. Nine-month expense increased 68%, including equity compensation and the absence of a prior-year receivable recovery.
- Interest expense was $13.1 million in Q3 and $28.8 million for nine months, substantially above prior-year periods as a result of debt outstanding and debt-cost amortization.
Cash flow, balance sheet and financing
- Nine-month operating cash flow was $(165.8) million, compared with $(226.5) million in 2020. Main 2021 uses included a $68.5 million decline in deferred revenue, a $58.2 million increase in receivables and a $55.3 million increase in inventory.
- Investing cash flow was $(14.2) million, including a $12.0 million equity investment. Financing cash flow was $188.0 million; cash increased $8.0 million to $116.4 million.
- At September 30, cash was $116.4 million and working capital was $277.1 million. Term-loan principal was $327.9 million; net carrying value of total debt was $303.5 million. The $200 million revolving facility had no borrowings, $14.5 million of letters of credit and $185.5 million available.
- In August, Array issued Series A preferred stock and common stock for an aggregate purchase price of $346 million. Proceeds were used partly to repay the revolver and prepay $100 million of the term loan. Preferred stock is classified as temporary equity; its liquidation preference was $352.8 million at quarter-end. It carries an initial 5.75% cash dividend rate, with specified step-ups, and has senior rights to common stock.
- Remaining performance obligations were $591.0 million, which the company expected to recognize as revenue over the next 12 months.
Outlook, risks and notable items
- The filing gives no specific revenue or earnings guidance. Management said commodity inflation and logistics pressures had reduced margins and operating cash generation; it believed the effects were temporary but could not predict when margins would improve. Management stated liquidity was adequate for the next 12 months.
- Key risks include component shortages, supply-chain and transportation disruption, commodity-price increases, customer concentration or nonpayment, changes in solar incentives and regulation, and variability in solar-project demand.
- Subsequent to quarter-end, Array agreed to acquire STI for approximately $662.7 million, comprising $264.0 million in stock and $401.7 million in cash, subject to a contingent payment capped at approximately $63.0 million. Closing was expected in Q1 2022, subject to approvals and other conditions. The company described planned funding from cash, credit facilities, additional preferred financing and debt markets, with a bridge facility of up to $300 million available subject to conditions.
- Disclosure controls were deemed ineffective at September 30 due to a previously reported material weakness in inventory cut-off and insufficient systems. Remediation steps were underway, including additional procedures, system enhancements and external consulting support.
- The company disclosed consolidated securities class actions and derivative litigation concerning alleged offering and proxy-statement misstatements. It said material loss was remote at the preliminary stage and recorded no material loss contingency. Separate patent and trade-secret litigation brought by Array was scheduled for trial in July 2022.
Important facts for investors to verify
- Whether commodity and logistics costs ease, and whether gross margins recover without further working-capital pressure.
- Cash conversion and the evolution of receivables, inventory and deferred revenue, given substantial operating cash outflow.
- Funding, purchase-price adjustments, regulatory approvals and integration risks for the STI acquisition, including resulting leverage and dilution.
- Preferred-stock dividend, redemption and governance terms, and the company’s ability to meet those obligations.
- Progress in remediating inventory cut-off controls and subsequent developments in the securities and derivative litigation.