ARRAY TECHNOLOGIES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included in Part I, "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q (this "Quarterly Report"), as well as our audited financial statements and notes thereto as of and for the year endedDecember 31, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Annual Report"). Each of the terms the "Company," "Array," "we," or "us" as used herein refers collectively toArray Technologies, Inc. and its wholly owned subsidiaries, unless otherwise stated. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections captioned "Forward-Looking Statements" and "Risk Factors" in this Quarterly Report and our 2021 Annual Report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "seek," "should," "will," "would" or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this report. You should read this report with the understanding that our actual future results may be materially different from what we expect. Important factors that could cause actual results to differ materially from our expectations include factors in "Summary Risk Factors" and the "Risk Factors" sections of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Summary Risk Factors Our business is subject to a number of risks that if realized could materially and adversely affect our business, financial conditions, results of operations, cash flows and access to liquidity. These risks are discussed more fully in the "Risk Factors" section of this Quarterly Report. Our principal risks include the following:
•we may be unable to successfully integrate the business of STI (as defined below) into our business or achieve the anticipated benefits of the STI Acquisition (as defined below);
•the capped call transactions may affect the value of our Convertible Notes (as defined below) and the market price of our common stock;
35
--------------------------------------------------------------------------------•the fundamental change repurchase feature of the Convertible Notes may delay or prevent an otherwise beneficial attempt to acquire us;
•if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer;
•the viability and demand for solar energy are impacted by many factors outside of our control, which makes it difficult to predict our future prospects;
•a loss of one or more of our significant customers, their inability to perform under their contracts, or their default in payment, could harm our business and negatively impact revenue, results of operations and cash flow;
•a failure to retain key personnel or a failure to attract additional qualified personnel may affect our ability to achieve our anticipated level of growth adversely affect our business;
•a drop in the price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of operations and prospects;
•defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products;
•developments in alternative technologies may have a material adverse effect on demand for our offerings;
•an increase in interest rates, or a reduction in the availability of tax equity or project debt capital in the global financial markets could make it difficult for customers to finance the cost of a solar energy system and could reduce the demand for our products; •existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems, which may significantly reduce demand for our products or harm our ability to compete; •the interruption of the flow of materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges or restrictions on imports and exports;
•changes in the
•the impact of the ongoing conflict inUkraine on our supply chain and cost of logistics could adversely affect the amount or timing of our revenues, results of operations or cash flows; •the reduction, elimination or expiration of government incentives for, or regulations mandating the use of, renewable energy and solar energy specifically could reduce demand for solar energy systems and harm our business;
•if we fail to, or incur significant costs in order to, obtain, maintain, protect, defend or enforce, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed;
•we may need to defend ourselves against third-party claims that we are infringing, misappropriating or otherwise violating others' intellectual property rights, which could divert management's attention, cause us to incur significant costs and prevent us from selling or using the technology to which such rights relate;
•significant changes in the cost of raw materials could adversely affect our financial performance;
36
--------------------------------------------------------------------------------
•we are dependent on transportation and logistics providers to deliver our
products in a cost-efficient manner. Disruptions to transportation and
logistics, including increases in shipping costs, could adversely impact our
financial condition and results of operations;
•the determination to restate prior period financial statements could negatively affect investor confidence and raise reputational issues;
•we may be unable to remediate our material weaknesses in a timely manner or at all;
•our substantial indebtedness could adversely affect our financial condition; and
•the ongoing COVID-19 pandemic has materially and adversely affected our business and results of operations. The duration and extent to which it will continue to adversely impact our business and results of operations remains uncertain and could be material.
Overview
We are one of the world's largest manufacturers of ground-mounting systems used in solar energy projects. Our principal products are a portfolio of integrated system comprised of steel supports, electric motors, gearboxes and electronic controllers commonly referred to as a single-axis "tracker." Trackers move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases their energy production. Solar energy projects that use trackers generate more energy and deliver a lower Levelized Cost of Energy than projects that use "fixed tilt" mounting systems, which do not move. The vast majority of ground mounted solar systems inthe United States , and an increasing amount outside of theU.S. , use trackers. Our flagship trackers uses a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. To avoid infringing on ourU.S. patent, our competitors must use designs that we believe are inherently less efficient and reliable. For example, our largest competitor's design requires one motor for each row of solar panels. As a result, we believe our products have greater reliability, lower installation costs, reduced maintenance requirements and competitive manufacturing costs. Our coreU.S. patent on a linked-row, rotating gear drive system does not expire untilFebruary 5, 2030 . Array acquired STI Norland inJanuary 2022 introducing a dual-row tracker design to the product portfolio. This tracker uses one motor to drive two connected rows, ideally suited for sites with irregular and highly angled boundaries or fragmented project areas. To offer a comprehensive set of solutions to the growing market, in September of 2022, Array also introduced a third tracker product requiring significantly less grading and civil works permitting prior to installation in addition to accommodating uneven terrain. This suite of products extends Array's target applications and bankability to deliver the best utility-scale solar tracker solutions to the market. All of our products are protected byU.S. and international patents, including our coreU.S. patent on a linked-row, rotating gear drive system which does not expire untilFebruary 5, 2030 . We sell our products to engineering, procurement and construction firms ("EPCs") that build solar energy projects and to large solar developers, independent power producers and utilities, often under master supply agreements or multi-year procurement contracts. During the nine months endedSeptember 30, 2022 , we derived 79% and 21% of our revenues from customers inthe United States and the rest of the world, respectively. We are aU.S. company, and our headquarters and principal manufacturing facility are inAlbuquerque, New Mexico . As ofSeptember 30, 2022 , we had 1,118 full-time employees, up from 471 as ofDecember 31, 2021 , with the increase primarily due to the STI Acquisition (as defined below). 37 --------------------------------------------------------------------------------
Acquisition of STI
OnJanuary 11, 2022 (the "Acquisition Date"), the Company closed the acquisition (the "STI Acquisition") of Soluciones TécnicasIntegrales Norland, S.L . and its subsidiaries (collectively, "STI") pursuant to that certain purchase agreement, datedNovember 10, 2021 , by and amongAmixa Capital, S.L . andAurica Trackers, S.L ., each a company duly organized under the laws of the Kingdom ofSpain (together, the "Sellers") and Mr. Javier Reclusa Etayo (the "STI Purchase Agreement"). In accordance with the STI Purchase Agreement, the Company paid closing consideration to the Sellers consisting of$410.5 million in cash and 13,894,800 shares of the Company's common stock. The fair value of the purchase consideration was$610.8 million and resulted in the Company owning 100% of the equity interests in STI.
The STI Acquisition provided the Company with an immediate presence in
As a result of the STI Acquisition, the Company began reporting its results of operations in two segments: its Array legacy operating segment (the "Array Legacy Operations") and the newly acquired operations (the "STI Operations") pertaining to STI. The primary source of revenue of the STI Operations is the design, manufacture and sale of its solar tracker system to utility scale customers in principal markets to includeSpain ,Brazil ,South Africa and other international markets.
Update on the Impact of COVID-19
We continue to closely monitor the ongoing impact of the COVID-19 pandemic in all the locations where we operate. Our priority remains the welfare of our employees. We expect persistent waves of COVID-19, including variants of the virus, to remain a headwind into the near future. The duration and extent to which it will continue to adversely impact our business and results of operations remain uncertain and could be material. We are continuously evaluating our capital structure in response to the current environment and expect that our current financial condition, including our liquidity sources will be adequate to fund future commitments. See additional discussion in the Liquidity and Capital Resources section below. Inflation The Company could see an impact from elevated inflation and other operating costs. Inflation inthe United States peaked at a year-over-year rate of 9.1% in June, before moderating to a still-elevated 8.2% in September. InEurope , energy price pressures and inflation have remained on an upward path, with SeptemberU.K. inflation rebounding to 10.1% andEuro Area inflation at 9.9%, both on a year-over-year basis. Interest rates have increased quickly and substantially as central banks in developed countries raise interest rates in an effort to subdue inflation, while government deficits and debt remain at high levels in many global markets. The eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital during our forecast period.
Impact of Potential Solar Module Supply Chain Disruptions
InFebruary 2022 ,Auxin Solar Inc. , aU.S. producer of crystalline silicon PV products, petitioned theU.S. Department of Commerce ("USDOC") to investigate alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed inCambodia ,Malaysia ,Thailand , andVietnam . OnMarch 28, 2022 , the USDOC announced that it would investigate the circumvention alleged in the petition. As disclosed in our quarterly report on Form 10-Q for the three months endedMarch 31, 2022 , the investigation created uncertainty related to the supply of solar modules. As a result of the USDOC's investigation, the Company saw a number of projects in its order book 38 -------------------------------------------------------------------------------- initially delayed; however, onJune 6, 2022 ,President Biden suspended, for a period of 24 months, certain antidumping and countervailing duties on crystalline silicon PV cells and module imports assembled and completed in southeastAsia . Due to these developments the Company has not observed a material decrease in customer demand for our product, and unless the duties are reinstated, the Company does not currently believe the investigation is reasonably likely to have a material adverse effect on future periods. While we do not sell solar modules, the degree of our exposure is dependent on, among other things, the impact of the investigation on the projects that are also intended to use our products, with such impact being largely out of our control. To date, the Company has seen a number of projects in our order book delayed as a result of the USDOC investigation. however, the ultimate severity or duration of the expected solar panel supply chain disruption or its effects on our clients' solar project development and construction activities remains uncertain. Additionally, certain suppliers could be blocked from importing solar panels tothe United States under the Uyghur Forced Labor Prevention Act ("UFLPA"). UFLPA seeks to block the import of products made with forced labor in certain areas ofChina . An inter-agency task force produced a report onJune 21, 2022 which, among other things, includes a list of entities that are believed to be using or benefiting from forced labor. Some suppliers of solar modules have seen shipments detained by US Customs andBorder Patrol pursuant to the UFLPA. These detainments have not directly impacted any of Array's projects to date; however, we cannot be certain that future detainments will not directly impact projects that use our products and services. Array is monitoring whether UFLPA will affect supplies of solar modules for any of the projects to which we sell our products.
Impact of the Ongoing Conflict in
The ongoing conflict inUkraine has reduced the availability of material that can be sourced inEurope and, as a result, increased logistics costs for the procurement of certain inputs and materials used in our products. We do not know ultimate severity or duration of the conflict inUkraine , but we continue to monitor the situation and evaluate our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition and results of operations. Performance Measures In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products from year to year is megawatts ("MWs") shipped generally and the change in MW shipped from period to period specifically. MWs are measured for each individual project and calculated based on the expected output of that project once installed and fully operational.
We also utilize metrics related to price and cost of goods sold per MW, including average selling price ("ASP") and cost per watt ("CPW"). ASP is calculated by dividing total applicable revenues by total applicable MWs, while CPW is calculated by dividing total applicable costs of goods sold by total applicable MWs. These metrics enable us to evaluate trends in pricing, manufacturing cost and customer profitability.
Key Components of Our Results of Operations
The following discussion describes certain line items in our consolidated statements of operations.
39
--------------------------------------------------------------------------------Revenue
Our operating segments generate revenue from the sale of solar tracking systems, parts and services. Our customers include EPCs, utilities, large solar developers and independent power producers. For each individual solar project, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars. Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, geographic mix of our customers, strength of competitors' product offerings, and availability of government incentives to the end-users of our products.
Our revenue growth is dependent on continued growth in the amount of solar energy projects installed each year as well as our ability to increase our share of demand in each of the geographies where we compete, expanding our global footprint to new evolving markets, growing our production and supply chain capabilities to meet demand and continuing to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers.
Cost of Revenue and Gross Profit
Cost of revenue for both segments consists primarily of product costs, including purchased components, as well as costs related to shipping, tariffs, customer support, product warranty, personnel and depreciation of test and manufacturing equipment. Personnel costs in cost of revenue includes both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Our product costs are affected by the underlying cost of raw materials, including steel and aluminum; component costs, including electric motors and gearboxes; technological innovation; economies of scale resulting in lower component costs and improvements in production processes and automation. In 2021, our business was impacted by the COVID-19 pandemic by increased raw materials and shipping costs and shipping delays which have resulted in reduced margins and in certain instances have incurred remediation costs and liquidated damages owed to the customer. We have modified our processes in order to decrease the impact on our margins from these cost increases; however, we do not know how long the current operating environment will persist. We do not currently hedge against changes in the price of raw materials. Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume.
Gross profit may vary from quarter to quarter and is primarily affected by our ASPs, product costs, product mix, customer mix, geographical mix, shipping method, warranty costs and seasonality.
Operating Expenses
Operating expenses consist of general and administrative costs, contingent consideration, as well as depreciation and amortization expense. Personnel-related costs are the most significant component of our operating expenses and include salaries, benefits, payroll taxes and commissions. Our full-time employee headcount in our general and administrative departments has grown from approximately 210 as ofDecember 31, 2021 to approximately 424, due in part to the STI Acquisition, as ofSeptember 30, 2022 , and we expect to continue to hire new employees to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect to continue to invest substantial resources to support our growth and continued technological 40 --------------------------------------------------------------------------------
advancement and anticipate that general and administrative and depreciation expenses will increase in absolute dollar amounts for the foreseeable future.
General and administrative expenses
General and administrative expenses consist primarily of salaries, equity-based compensation, employee benefits and payroll taxes related to our executives, sales, finance, human resources, information technology, engineering and legal organizations, as well as travel, facilities costs, marketing, bad debt and fees for professional services. Professional services consist of audit, legal, tax, insurance, information technology and other costs. We expect an increase in the number of sales and marketing personnel in connection with the expansion of our global sales and marketing footprint, enabling us to penetrate new markets. The majority of our sales in 2022 were in theU.S. ; however, with the STI Acquisition, we continue to expand our international presence with additional global sales staff. We currently have a sales presence in theU.S. ,Australia , theU.K. ,Spain ,South Africa andBrazil . We intend to continue to expand our sales presence and marketing efforts to additional countries. We also expect that as a public company we will incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities laws and other regulations, as well as additional insurance, investor relations and other costs associated with being a public company. We also anticipate an increase in our spend related to product innovation as we hire additional engineering resources and increase our external research & development spend.
Contingent Consideration
Contingent consideration consists of the changes in fair value of the Taxes
Receivable Agreement ("TRA") entered into with
The TRA liability is recorded at fair value and changes in the fair value are recognized in earnings. The TRA will generally provide for the payment byArray Tech, Inc. (f/k/aArray Technologies, Inc. ) toRon P. Corio for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods byArray Tech, Inc. from the use of certain deductions generated by the increase in the tax value of the developed technology. Estimating fair value of the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments toRon P. Corio include the timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA.
Depreciation
Depreciation in our operating expense consists of costs associated with
property, plant and equipment ("PP&E") not used in manufacturing of our
products. We expect that as we continue to grow both our revenue and our general
and administrative personnel, we will require some additional PP&E to support
this growth resulting in additional depreciation expense.
Amortization
Amortization of intangibles consists of developed technology, customer relationships, backlog, and trade name amortized over their expected period of use.
41
--------------------------------------------------------------------------------Non-Operating Expenses
Interest Expense
Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Facility and our 1.00% Convertible Senior Notes due 2028 (the "Convertible Notes") issued inDecember 2021 , as well as other debt assumed in the STI Acquisition.
Legal Settlement
Legal settlement income includes a legal settlement awarded and paid fromNextracker LLC , for$42.8 million for the Company asserting (among other claims) trade secret misappropriation, tortious interference with contract, fraud, and breach of contract (the "Nextracker Litigation").
Income Tax Expense
We are subject to
42
--------------------------------------------------------------------------------Results of Operations
The following table sets forth our consolidated statement of operations (dollars
in thousands):
Three Months Ended September 30, Increase/Decrease Nine Months Ended September 30, Increase/Decrease
2022 2021 $ % 2022 2021 $ %
Revenue $ 515,024 $ 188,686 $ 326,338 173 % $ 1,235,475 $ 633,442 $ 602,033 95 %
Cost of revenue 434,801 182,789 252,012 138 % 1,088,719 560,872 527,847 94 %
Gross profit 80,223 5,897 74,326 1260 % 146,756 72,570 74,186 102 %
Operating expenses
General and administrative 38,911 18,493 20,418 110 % 107,881 58,279 49,602 85 %
Contingent consideration (572) 936 (1,508) (161) % (5,981) 1,071 (7,052) (658) %
Depreciation and amortization 23,364 5,984 17,380 290 % 70,405 17,949 52,456 292 %
Total operating expenses 61,703 25,413 36,290 143 % 172,305 77,299 95,006 123 %
Income (loss) from operations 18,520 (19,516) 38,036 (195) % (25,549) (4,729) (20,820) 440 %
Other income (expense)
Other expense, net (399) (297) 102 (34) % (27) (497) (470) (95) %
Legal settlement 42,750 - 42,750 100 % 42,750 - 42,750 100 %
Foreign currency gain (loss) (159) - 159 100 % 1,968 - 1,968 100 %
Interest expense (8,746) (13,109) (4,363) 33 % (23,709) (28,769) (5,060) (18) %
Total other income (expense) 33,446 (13,406) (46,852) 349 % 20,982 (29,266) (50,248) (172) %
Income (loss) before income
tax (benefit) expense 51,966 (32,922) 84,888 (258) % (4,567) (33,995) 29,428 (87) %
Income tax (benefit) expense 11,144 (5,361) 16,505 (308) % (18,109) (5,493) (12,616) 230 %
Net income (loss) $ 40,822 $ (27,561) $ 68,383 (248) % $ 13,542 $ (28,502) $ 42,044 (148) %
43--------------------------------------------------------------------------------
The following table provides details on our operating results by reportable segment for the respective periods (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, Increase/Decrease September 30, Increase/Decrease
Revenue: 2022 2021 $ % 2022 2021 $ %
Array Legacy Operations $ 400,463 $ 188,686 $ 211,777 112 % $ 998,292 $ 633,442 $ 364,850 58 %
STI Operations 114,561 - 114,561 100 % 237,183 - 237,183 100 %
Total Revenue $ 515,024 $ 188,686 $ 326,338 173 % $ 1,235,475 $ 633,442 $ 602,033 95 %
Gross Profit:
Array Legacy Operations $ 63,921 $ 5,897 $ 58,024 984 % $ 119,029 $ 72,570 $ 46,459 64 %
STI Operations 16,302 - 16,302 100 % 27,727 - 27,727 100 %
Total Gross Profit $ 80,223 $ 5,897 $ 74,326 1260 % $ 146,756 $ 72,570 $ 74,186 102 %
Comparison of three months ended
Revenue
Our consolidated revenue increased by$326.3 million , or 173%, for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The increase was partially driven by the STI Acquisition, which added$114.6 million of revenue when compared to the three months endedSeptember 30, 2021 . Excluding the impact of the STI Acquisition, revenue was up$211.8 million , or 112%, driven by both an increase in the total number of MWs shipped and an increase in ASP. Revenue for Array Legacy Operations increased 112% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Total MWs shipped were up approximately 63% for the three months endedSeptember 30, 2022 , driven by increased customer demand for our product. ASP for the three months endedSeptember 30, 2022 was up 29% compared to the three months endedSeptember 30, 2021 , which is reflective of higher pass-through pricing to our customers. Revenue for STI Operations increased by$114.6 million for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , due to the STI Acquisition occurring inJanuary 2022 with no activity in the prior period.
Cost of Revenue and Gross Profit
Consolidated cost of revenue increased by$252.0 million , or 138%, for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily due to the increase in the number of MWs delivered and the STI Acquisition. Gross profit as a percentage of revenue increased from 3% for the three months endedSeptember 30, 2021 to 16% for the three months endedSeptember 30, 2022 . The increase in gross profit as a percentage of revenue reflects higher pass-through pricing of our material and logistics costs. Gross profit as a percentage of revenue for the Array Legacy Operations increased to 16% for the three months endedSeptember 30, 2022 from 3% for the three months endedSeptember 30, 2021 . The increase was due to a higher proportion of our projects with improved pass-through pricing of our material and logistics costs. 44 --------------------------------------------------------------------------------
Gross profit as a percentage of revenue for the STI segment was 14% for the
three months ended
Operating Expenses:
General and Administrative
Consolidated general and administrative expense increased by$20.4 million , or 110%, for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The increase in expense was primarily due to increased consulting costs, professional fees, legal costs, as well as higher payroll and related costs due to our growing internal headcount and the STI Acquisition, which had$5.7 million in general and administrative expense.
Contingent Consideration
Consolidated contingent consideration expense decreased by$1.5 million , for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The decrease was due to a decrease in the valuation of the associated liability. Depreciation
Consolidated depreciation expense for the three months ended
Amortization of Intangibles
Consolidated amortization of intangibles increased by$17.2 million , or 292%, for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily due to intangibles added as a result of the STI Acquisition. Legal Settlement Legal settlement income increased due to the Company being awarded and paid a settlement fromNextracker LLC , for$42.8 million for the Company asserting (among other claims) trade secret misappropriation, tortious interference with contract, fraud, and breach of contract (the "Nextracker Litigation").
Interest Expense
Consolidated interest expense decreased by$4.4 million , or 33%, for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 , primarily due to the write-off of fees associated with refinancing our debt that occurred in the three months endedSeptember 30, 2021 for which we have no similar fees in the current period. As ofSeptember 30, 2022 , we had$425 million outstanding on the Convertible Notes,$323.6 million outstanding under the Term Loan Facility and no balance outstanding under the Revolving Credit Facility. The Credit Facility has variable interest rates that are expected to fluctuate with the Federal Funds rate so interest expense could increase for the Term Loan Facility and the Revolving Credit Facility.
Income Tax Benefit
Consolidated income tax benefit increased by$16.5 million , or 308% for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The tax expense in the three months endedSeptember 30, 2022 includes tax expense of$8.7 million on the legal settlement income recorded discreetly in the current period. Our effective tax rate, excluding the legal settlement was 26.5% for the three 45 -------------------------------------------------------------------------------- months endedSeptember 30, 2022 and 16.3% for the three months endedSeptember 30, 2021 . The tax benefit increase, excluding the legal settlement, is primarily related to non-taxable contingent income, and a favorable mix of income for the three months endedSeptember 30, 2022 .
Comparison of the nine months ended
Revenue
Consolidated revenue increased by$602.0 million , or 95%, for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily driven by a revenue increase of$364.9 million , or 58%, resulting from both an increase in the total number of MWs shipped and an increase in ASP excluding the impact of the STI Acquisition. The remainder of the increase in revenue resulted from the STI Acquisition of$237.2 million . Revenue for Array Legacy Operations increased 58% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Total MWs shipped were up approximately 31% for the nine months endedSeptember 30, 2022 , driven by increased customer demand for our product. ASP for the nine months endedSeptember 30, 2022 was up 20% compared to the nine months endedSeptember 30, 2021 , which is reflective of higher pass-through pricing to our customers. Revenue for STI Operations increased by$237.2 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , due to the STI Acquisition occurring inJanuary 2022 with no activity in the prior period.
Cost of Revenue and Gross Profit
Consolidated cost of revenue increased by$527.8 million , or 94%, for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to the STI Acquisition and the higher cost of raw materials and logistics compared to the prior year period. Gross profit as a percentage of revenue increased from 11% for the nine months endedSeptember 30, 2021 to 12% for the nine months endedSeptember 30, 2022 . The increase in gross profit as a percentage of revenue reflects better pass-through pricing to our customers to offset higher commodity prices and logistics costs. Gross profit as a percentage of revenue increased for Array Legacy Operations to 12% for the nine months endedSeptember 30, 2022 from 11% for the nine months endedSeptember 30, 2021 due to improved pass through pricing of commodity costs.
Gross profit as a percentage of revenue was 11% for STI for the nine months
ended
Operating Expenses: General and Administrative Consolidated general and administrative expenses increased by$49.6 million , or 85%, for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase in expense was primarily due to the STI Acquisition, which resulted in an increase of$11.6 million . Additionally, increased consulting costs and other professional fees, as well as increased headcount, led to higher payroll and related costs. 46 --------------------------------------------------------------------------------
Contingent Consideration
Consolidated contingent consideration expense decreased by$7.1 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The decrease was due to a decrease in the valuation of the associated liability. Depreciation
Consolidated depreciation expense for the nine months ended
Amortization of Intangibles
Consolidated amortization of intangibles increased by$52.1 million , or 296%, for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to intangibles added as a result of the STI Acquisition. Legal Settlement
Legal settlement income increased due to the Company being awarded and paid a
settlement from
Other Expense, Net
Consolidated other income (expense) increased by
Foreign Currency Gain
Consolidated foreign currency gain increased by$2.0 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , due to the foreign currency translation gain resulting from the STI Acquisition.
Interest Expense
Consolidated interest expense decreased by$5.1 million , or 18%, for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , primarily due to the write-off of fees associated with refinancing our debt that occurred in the nine months endedSeptember 30, 2021 for which we have no similar fees in the current period. In the nine months endedSeptember 30, 2021 , we paid off a portion of our Term Loan Facility and therefore expensed the associated fees that were capitalized. Our outstanding debt as ofSeptember 30, 2022 for which interest expense is associated includes$425.0 million outstanding on the Convertible Notes,$323.6 million outstanding under the Term Loan Facility and no balance outstanding under the Revolving Credit Facility. We expect interest expense to be higher for the remainder of 2022 compared to 2021 as a result of the debt outstanding under the Convertible Notes. In addition, the Credit Facility has variable interest rates expected to fluctuate with the Federal Funds rate so interest expense could increase for the Term Loan Facility and the Revolving Credit Facility. 47 --------------------------------------------------------------------------------
Income Tax Benefit
Consolidated income tax benefit increased by$12.6 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The tax expense in the nine months endedSeptember 30, 2022 includes tax expense of$8.7 million on the legal settlement income which was recorded discretely in the quarter. Our effective tax rate, excluding the legal settlement benefit was 56.7% for the nine months endedSeptember 30, 2022 and 16.2% for the nine months endedSeptember 30, 2021 . The benefit increase excluding the legal settlement, is primarily related to non-taxable contingent consideration and the mix of earnings in foreign jurisdictions partially offset by an increase in non-deductible officer compensation for the nine months endedSeptember 30, 2022 .
Liquidity and Capital Resources
Historical Cash Flow
The following table compares the historical cash flow (in thousands):
Nine Months
Ended
2022 2021
Net cash used in operating activities $ 44,023 $ (165,837)
Net cash used in investing activities (380,506) (14,227)
Net cash provided by financing activities 33,146 188,014
Effect of exchange rate changes on cash and cash (1,555) -
equivalents
Net change in cash and cash equivalents$ (304,892)
$ 7,950
We have historically financed our operations primarily with the proceeds from capital contributions, operating cash flows and short and long-term borrowings. Our ability to generate positive cash flow from operations is dependent on the strength of our gross margins as well as our ability to quickly turn our working capital. Due to current macroeconomic conditions, our industry has seen rapid changes in commodity prices, global tightening of supply chains, and strained logistics. These factors adversely impacted our business, causing us to experience decreased margins and thus decreased cash from operations. In addition, they led to an increase in our unbilled receivables and in some instances liquidated damages owed to our customers. Unbilled receivables, which represent temporary timing differences between shipments made and billing milestones achieved, were$137.0 million and$111.2 millions of the accounts receivable balances as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. These amounts have not been billed because we are waiting for agreed upon billing stipulations such as billing on a specified date of the month or upon completion of MW deliveries. The Company continues to improve its supply chain, logistics, and labor shortage issues to avoid causing any additional delays in delivering specific components to complete a MW delivery. Accordingly, we would expect the unbilled receivable balance as a percentage of revenue to improve once the billing criteria is satisfied and the customers are invoiced. The extent to which macroeconomic concerns, including the COVID-19 pandemic, rising interest rates, elevated inflation levels and the ongoing conflict inUkraine , may further impact the Company's business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. We have taken mitigating steps to overcome the economic challenges and, therefore, believe the impact to be temporary, as demonstrated by our sequential margin improvement over the last four quarters. Mitigation efforts to date have generally consisted of the introduction of new supply routes, the use of bulk shipping (to a limited degree), and-with respect to commodity price increases-changes in the Company's contracting process that are designed to narrow the timeframe between when a price is agreed upon to when prices for the Company's most volatile cost inputs are fixed. The Company has utilized these strategies in combination over 48 -------------------------------------------------------------------------------- the last twelve months and expects to continue to do so in response to the recent challenging environment. We continuously evaluate our ability to meet our obligations over the next 12 months and we have sufficient liquidity as well as financing options available to fund current and future commitments. InJanuary 2022 , we issued 50,000 of Series A Redeemable Perpetual Preferred Stock (as defined below), and 1,125,000 shares of our common stock in an Additional Closing (as defined below) for an aggregate purchase price of$49.4 million .
As of
As of
Operating Activities
For the nine months endedSeptember 30, 2022 , cash provided by operating activities was$44.0 million , primarily due to an increase in net income and the Company being awarded and paid a settlement fromNextracker LLC , for$42.8 million for the Nextracker Litigation. In addition, accounts payable and accruals increased cash by$42.2 million and$41.3 million , respectively, driven by higher expenses associated with higher sales, offset by a use from accounts receivable of$139.0 million driven primarily by higher sales. For the nine months endedSeptember 30, 2021 , cash used in operating activities was$165.8 million , primarily due a decrease in deferred revenue of$68.5 million for which we made payments to our suppliers for products that we received the cash for in 2020, but that we did not ship until 2021, an increase in accounts receivable of$58.2 million , and an increase in inventories of$55.4 million . Investing Activities
For the nine months ended
For the nine months ended
Financing Activities
For the nine months endedSeptember 30, 2022 , net cash provided by financing activities was$33.1 million , of which and$48.4 million related to proceeds from the Additional Closing inJanuary 2022 offset by a dividend payment of$18.4 million on the Series A preferred stock. For the nine months endedSeptember 30, 2021 , net cash used by financing activities was$188.0 million , of which$345.6 million was proceeds from the Series A that closed onAugust 11, 2021 ,$102.0 million was from proceeds under the Revolving Credit Facility, offset by a$132.2 million payment on the Term Loan Facility, a$102.0 million payment of the Revolving Credit Facility,$11.1 million in equity issuance costs associated with the Series A and$6.6 million in fees paid on the Senior Secured Credit Facility and to increase the limit on the Revolving Credit Facility by$50.0 million . 49 --------------------------------------------------------------------------------
Series A Redeemable Perpetual Preferred Stock
OnAugust 10, 2021 , the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") withBCP Helios Aggregator L.P. , aDelaware limited partnership (the "Purchaser"), an investment vehicle of funds affiliated with Blackstone Inc. Pursuant to the Securities Purchase Agreement, onAugust 11, 2021 , the Company issued and sold to the Purchaser 350,000 shares of a newly designated Series A Redeemable Perpetual Preferred Stock of the Company, par value$0.001 per share (the "Series A Perpetual Preferred Stock"), having the powers, designations, preferences, and other rights set forth in the Certificate of Designations, and 7,098,765 shares of the Company's common stock, par value$0.001 per share, for an aggregate purchase price of$346.0 million . Further, pursuant to the Securities Purchase Agreement, and subject to the terms and conditions set forth therein, including the expiry or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the Company has issued and sold to the Purchaser 776,235 shares of common stock for an aggregate purchase price of$776 . For more information related to the Series A Redeemable Perpetual Preferred Stock, see Note 13 - Redeemable Perpetual Preferred Stock , to the accompanying condensed consolidated financial statements. InJanuary 2022 , we issued 50,000 of Series A Redeemable Perpetual Preferred Stock, and 1,125,000 shares of our common stock in an Additional Closing for an aggregate purchase price of$49,376,125 .
Registration Rights Agreement
In connection with the Securities Purchase Agreement, onAugust 10, 2021 , the Company and the Purchaser entered into a Registration Rights Agreement pursuant to which, among other things, the Company granted the Purchaser certain registration rights with respect to common stock purchased pursuant to the Securities Purchase Agreement, including customary shelf registration rights and "piggyback" registration rights. Direct costs associated with the issuance of the securities were$11.1 million , which along with the$4.4 million discount, have been accounted for as a reduction in the proceeds of the securities. These net proceeds of$334.6 million have been allocated on the balance sheet to the preferred shares of$229.8 million , common stock of$105.4 million and additional paid-in capital of$12.4 million for the committed financing put right. The Company has presented the preferred shares in temporary equity and is accreting the carrying amount to its full redemption amount from the date of issuance to the earliest redemption date using the effective interest method. Such accretion totaled$5.9 million and$17.2 million for the three and nine months endedSeptember 30, 2022 . The Company accreted the dividends at an accrual rate of 6.25% to the Liquidation Preference of the Series A Redeemable Perpetual Preferred Stock, or$6.1 million and$18.7 million in dividends, for the three and nine months endedSeptember 30, 2022 , respectively.
Debt Obligations
For a discussion of our debt obligations see Note 10 - Senior Secured Credit Facility and Note 11 - Convertible Debt in our condensed consolidated financial statements included in this Quarterly Report.
Surety Bonds
As ofSeptember 30, 2022 , we posted surety bonds in the total amount of approximately$175.2 million . We are required to provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company's performance in accordance with contractual or legal obligations. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. 50 --------------------------------------------------------------------------------
Critical Accounting Policies and Significant Management Estimates
As ofSeptember 30, 2022 , there were the following changes in the application of our critical accounting policies or estimation procedures from those presented in our 2021 Annual Report. Business Combinations The Company accounts for its business acquisitions under the acquisition method of accounting in accordance with theFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 805 Business Combinations ("ASC 805"). The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples amongst other items. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows. Under the acquisition method of accounting, the aggregate amount of consideration we pay for a company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill.Goodwill is evaluated for impairment annually.
Foreign Currency Translation
For non-U.S. subsidiaries that operate in a local currency environment, assets and liabilities are translated into theU.S. dollar at period end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the period. Translation adjustments for these subsidiaries are accumulated as a separate component of accumulated other comprehensive income in equity. For non-U.S. subsidiaries that use aU.S. dollar functional currency, local currency inventories and property, plant and equipment are translated intoU.S. dollars at rates prevailing when acquired, and all other assets and liabilities are translated at period end exchange rates. Inventories charged to cost of revenue and depreciation are remeasured at historical rates, and all other income and expense items are translated at average exchange rates prevailing during the period. Gains and losses which result from remeasurement are included in earnings.
© Edgar Online, source
