Array Technologies, Inc. — Q1 2021 Form 10-Q
Business and period: Array manufactures and supplies solar tracking systems. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. The company attributed part of the comparison to customers pulling deliveries into Q1 2020 ahead of the investment tax credit rate step-down.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $245.9 million | $437.7 million | Down 44% |
| Gross profit / margin | $43.9 million / 17.8% | $118.4 million / 27.1% | Margin down 9.3 percentage points |
| Operating income | $13.1 million | $101.3 million | Down 87% |
| Net income | $2.9 million | $73.7 million | Down 96% |
| Diluted EPS | $0.02 | $0.61 | Down $0.59 |
| Cash used in operations | $42.1 million | $200.6 million | Use decreased |
Drivers: Megawatts delivered fell approximately 28%. Management cited higher commodity prices, higher logistics costs and lower fixed-cost absorption for the lower gross margin. General and administrative expense rose 111% to $24.7 million, including follow-on offering-related professional fees, higher headcount, and $6.3 million of accelerated equity compensation. Interest expense rose 72% to $9.0 million, primarily reflecting the term loan.
Financial position and liquidity
- Cash and cash equivalents were $19.1 million at March 31, 2021, versus $108.4 million at December 31, 2020. Net working capital was $53.2 million.
- Total assets were $583.3 million and total liabilities were $653.4 million; stockholders’ deficit was $70.1 million.
- Term loan principal was $430.0 million; its balance-sheet carrying amount, net of discount and issuance costs, was $396.0 million. The company made $30.0 million of principal payments during the quarter.
- The revolving facility was expanded to $200.0 million. There were no revolver borrowings; $39.7 million of letters of credit left $160.3 million available. The company reported compliance with debt covenants.
- Investing cash use was $10.6 million, including a $10.0 million investment in a private company’s preferred stock. Financing cash use was $36.6 million, including debt repayment and facility amendment fees. Cash declined by $89.3 million in the quarter.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings or margin guidance. Management said operating cash flows and available revolver capacity should be sufficient for future cash needs.
- Remaining performance obligations were $394.4 million at quarter-end; the company expected to recognize all of them within the next 12 months. This is not a guarantee of future revenue.
- Management said operations continued without interruption during COVID-19, while noting that the pandemic’s future effects remained uncertain.
- Disclosed business risks include solar-market demand and customer concentration, raw-material price increases, shipping and logistics disruptions, supply-chain interruption, tariffs, changes to renewable-energy incentives and regulation, and customer financing conditions.
- Disclosure controls and procedures were deemed ineffective at a reasonable-assurance level because of a material weakness in inventory cut-off related to insufficient systems. Management reported no material change in internal control over financial reporting during the quarter.
- The company is pursuing trade-secret and other claims in litigation against former employee Colin Mitchell and other defendants; the case had not reached trial. Management reported no other claims it believed would have a material adverse effect, while cautioning that litigation outcomes are uncertain.
- The March follow-on offering triggered accelerated vesting of Class B units and $6.3 million of compensation expense. The company also adopted lease accounting early, recognizing operating lease right-of-use assets and liabilities; adoption did not materially affect earnings or cash flows.
Important facts for investors to verify
- Whether shipment volumes recover and gross margins improve as commodity, logistics and fixed-cost absorption pressures change.
- Cash conversion and working-capital trends, particularly deferred revenue, inventory, receivables and payables, given the quarter’s operating cash outflow and cash decline.
- Debt service, interest costs and the effect of the term loan’s annual excess-cash-flow payment provision, alongside actual revolver availability and covenant compliance.
- Progress remediating the inventory cut-off material weakness and the timing of any independent assessment of control effectiveness.
- Conversion of the $394.4 million performance-obligation balance into revenue, and any changes in customer delivery schedules or cancellations.