Array Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Array manufactures and supplies solar tracking systems. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $202.8 million | $114.9 million | $448.7 million | $552.6 million |
| Gross profit / margin | $26.8 million / 13.2% | $22.2 million / 19.3% | $70.6 million / 15.7% | $140.6 million / 25.4% |
| Operating income | $5.7 million | $1.2 million | $18.8 million | $102.6 million |
| Net income (loss) | $(0.02) million | $2.4 million | $2.9 million | $76.1 million |
| Diluted EPS | $0.00 | $0.02 | $0.02 | $0.63 |
- Q2 revenue rose 76% year over year; management attributed this mainly to approximately 74% more MW delivered. Six-month revenue fell 19%, while MW delivered decreased approximately 2%; lower average selling prices also contributed.
- Margins weakened materially: management cited higher commodity and logistics costs. Q2 gross margin declined to 13.2% from 19.3%; six-month gross margin fell to 15.7% from 25.4%.
- Six-month operating cash flow was negative $134.1 million, versus negative $247.9 million in 2020. The 2021 outflow reflected a $98.4 million decline in deferred revenue, higher receivables and inventory, among other items. Investing cash outflow was $13.2 million, primarily a $12.0 million equity investment.
- Cash and cash equivalents were $17.7 million at June 30, down from $108.4 million at December 31, 2020. Net working capital was $162.1 million.
- Debt totaled approximately $530.9 million before unamortized discounts and issuance costs: $428.9 million on the term loan and $102.0 million on the revolving facility. The company reported $87.0 million of revolver availability after $11.0 million of standby letters of credit. The term loan rate was 3.75%; management expected interest expense to remain higher than in 2020.
- Remaining performance obligations were $197.5 million, all expected to be recognized as revenue within 12 months. Deferred revenue fell to $51.5 million from $149.8 million at year-end.
Material changes and management commentary
- Higher delivery volume drove Q2 revenue growth, but was insufficient to offset the margin pressure from commodity and logistics inflation. For the first half, revenue and earnings were substantially below the prior-year period, which included unusually heavy customer deliveries ahead of the 2020 investment tax credit step-down.
- Six-month general and administrative expense rose 74% to $39.8 million, including equity compensation and higher payroll costs; the prior-year comparison also benefited from a receivables recovery. The company recognized $12.0 million of equity-based compensation for the first half, including accelerated expense after the March 2021 follow-on offering.
- Management described margin and cash-flow pressure from commodity prices and strained logistics as temporary, but said it could not predict when margins would improve. It cited persistent COVID-19 waves as a near-term headwind and stated it expected adequate liquidity for the next 12 months.
- No specific revenue, earnings, or margin guidance is provided in the supplied filing text. The company said it remained in compliance with debt covenants at June 30, 2021.
Subsequent financing, risks, and contingencies
- Blackstone-affiliated investment after quarter-end: On August 11, 2021, the company sold 350,000 shares of Series A perpetual preferred stock and 7,098,765 common shares for $346.0 million. It said it intended to use net proceeds to repay the revolver, prepay at least $100 million of term debt, and for general corporate purposes. The preferred stock initially carries a 5.75% annual cash dividend rate, with an option before the fifth anniversary to accrue dividends at 6.25%. The transaction also creates potential common-share dilution and gives the investor specified board representation and consent rights. An additional investment commitment of up to $148 million is available subject to conditions; commitment premiums may apply.
- Key operating risks include supply shortages and transportation constraints, higher raw-material and shipping costs, tariffs, COVID-19 disruption, changes in solar incentives and regulation, customer or project financing weakness, and dependence on continued solar-project demand. The company does not hedge raw-material price exposure.
- The company disclosed securities and derivative lawsuits alleging misstatements or omissions related to its offerings. It considered material loss remote at the preliminary stage and recorded no material loss contingency. A separate intellectual-property and trade-secret case brought by Array had a trial set for July 2022.
- Surety bonds totaled approximately $131 million; management stated these ordinary-course arrangements did not adversely affect liquidity or capital resources.
- Disclosure controls were deemed ineffective at June 30, 2021 because of a material weakness in inventory cut-off controls related to insufficient systems. No material control changes during the quarter were reported.
Important facts for investors to verify
- Whether commodity, freight, and supply-chain costs ease enough to restore gross margins, and whether management’s view that the impact is temporary proves accurate.
- How the August financing proceeds were ultimately applied, the resulting debt balance and interest burden, and the effect of the preferred dividend terms and common-share issuance on existing shareholders.
- Whether the company converts its $197.5 million of remaining performance obligations into revenue on schedule, and how customer collections and working-capital needs affect cash flow.
- Developments in the securities and derivative litigation, the intellectual-property case, and any change in potential loss exposure.
- Progress remediating the inventory cut-off material weakness and whether disclosure controls become effective.