Array Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Array manufactures and supplies solar tracking systems. On January 11, 2022, it acquired Spanish tracker supplier STI, expanding its presence in Brazil and Western Europe. STI contributed $49.9 million of revenue from acquisition through quarter-end.
Financial performance and position
- Revenue: $300.6 million, up 21% from $248.2 million. The increase included STI; Q1 2021 also included $40.5 million of ITC-related revenue with no comparable Q1 2022 revenue. Excluding STI and that prior-period revenue, management reported growth of $43 million, or 21%.
- Gross profit and margin: $26.6 million and 8.8%, versus $46.2 million and 18.6% a year earlier. Management attributed the margin decline primarily to higher commodity and logistics costs.
- Operating results: Operating loss of $32.2 million, compared with operating income of $15.4 million. Net loss was $22.1 million, versus net income of $4.6 million; loss attributable to common shareholders was $33.7 million, or $0.23 per diluted share, including $11.6 million of preferred dividends and accretion.
- Cash flow: Cash used in operations was $50.1 million, compared with $42.1 million used in Q1 2021. Working-capital movements included increases in accounts receivable and inventory, partly offset by higher accounts payable. Investing cash outflow was $376.2 million, principally for the STI acquisition. Financing provided $100.7 million. Cash fell by $318.2 million to $49.5 million.
- Liquidity and working capital: Net working capital was $383.9 million. The $200 million revolving facility had $52.0 million drawn and $114.8 million available; management cautioned that debt covenants may limit access. Unbilled receivables were $136.0 million, up from $111.2 million at year-end.
- Debt and preferred stock: Balance-sheet current and long-term debt totaled $826.4 million, including the senior secured facility, convertible notes and STI-assumed debt. The company reported $377.7 million outstanding under its senior secured facility and $425 million principal on 1.00% convertible notes due 2028. Series A preferred stock had a $400 million liquidation preference and a $281.8 million carrying value.
- Other items: General and administrative expense rose 61% to $39.8 million. Depreciation and amortization increased to $22.7 million, largely because of acquired intangibles. A $3.7 million fair-value decrease in the tax receivable agreement liability was recorded as a benefit; a $3.9 million foreign-currency gain also benefited results.
Material changes and outlook
- The STI acquisition was valued at $610.8 million, funded with $410.5 million cash consideration and 13.9 million common shares. Preliminary purchase accounting included $327.8 million of goodwill and $318.4 million of identifiable intangibles; the allocation remained subject to change during the measurement period.
- Results reflect sharply lower gross margin amid higher raw-material and logistics costs, alongside acquisition-related amortization and expenses. The company described cost and supply-chain pressures as potentially temporary but said timing of margin recovery was uncertain.
- There is no specific financial guidance in the provided filing text. Remaining performance obligations were $301.3 million, all expected to be recognized as revenue within 12 months.
- Management said it expected adequate liquidity for the next 12 months, with operating cash flow, the revolver and a remaining delayed-draw preferred-stock commitment among potential funding sources. A draw on preferred stock would increase dividend obligations and common shares; the revolver may be constrained by covenants.
Risks, contingencies and controls
- Commodity inflation, shipping disruption, labor constraints and supply-chain delays have pressured margins and cash conversion, contributed to unbilled revenue and sometimes resulted in customer liquidated damages. Array does not hedge raw-material prices.
- A U.S. Department of Commerce investigation into alleged circumvention of solar-module import duties had already delayed some projects in Array’s order book. Potential effects of the investigation and the Uyghur Forced Labor Prevention Act were uncertain. The Ukraine conflict was also increasing logistics costs and limiting availability of some European materials.
- COVID-19 was expected to remain a near-term headwind, with duration and effects uncertain. Other identified risks include integration of STI, customer concentration and payment, solar-market demand, tariffs and regulation, and substantial indebtedness.
- Array disclosed continuing material weaknesses in internal controls over the control environment and monitoring, inventory, revenue recognition and accounts receivable. Disclosure controls and procedures were concluded to be ineffective as of March 31, 2022; management said it was pursuing remediation.
- The company reported a putative securities class action and related derivative litigation; it considered a material loss remote at this stage and had recorded no material loss contingency. A separate trade-secret and related lawsuit brought by Array had a trial date set for July 18, 2022. Surety bonds outstanding were approximately $168.5 million.
Important facts for investors to verify
- Whether gross margins recover as commodity, freight and supply-chain conditions evolve, and whether delayed projects convert to billings and cash collections.
- STI integration performance, final acquisition valuation and the contribution of the acquired business to future profitability and cash flow.
- Liquidity headroom after the acquisition, including covenant constraints on the revolver and the cost and dilution implications of any preferred-stock draw.
- Progress in remediating the disclosed internal-control material weaknesses and any implications for reporting reliability.
- Developments in the solar-module trade investigation, project delays, litigation and the company’s preferred dividend obligations.