ARRAY TECHNOLOGIES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our unaudited condensed financial
statements and the related notes and other financial information included in
this Quarterly Report on Form 10-Q and our audited financial statements and
notes thereto as of and for the years ended
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:
•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 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;
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•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 on imports and exports; •changes in theU.S. trade environment, including the imposition of import tariffs, 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; •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 requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain qualified board members and officers; •we face risks related to actual or threatened health epidemics, such as the COVID-19 pandemic, and other outbreaks, which could significantly disrupt our manufacturing and operations; and •certain provisions in our certificate of incorporation and our bylaws may delay or prevent a change of control.
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.
Overview
We are one of the world's largest manufacturers of ground-mounting systems used in solar energy projects. Our principal product is an integrated system 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 up to 25% more energy than projects that use "fixed tilt" mounting systems, which do not move.
Our trackers use a patented design that allows one motor to drive multiple rows
of solar panels through articulated driveline joints. To avoid infringing on our
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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. In the three months ended
We are a
Impact of COVID-19
In
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 is measured for each individual project and is 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, whereas 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.
Revenue
We generate revenue from the sale of solar tracking systems and parts. Our customers include EPCs, utilities, 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.
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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, expand our global footprint to new evolving markets, grow our production capabilities to meet demand and to continue 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 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. 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 150 as of
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 2020 were in the
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that as a public company we will incur additional audit, tax, accounting, legal and other costs related to compliance with applicable securities 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 earn-out
and the Tax Receivable Agreement ("TRA") entered into with
The earn-out liability was recorded at fair value as of
The TRA liability was recorded at fair value at the Acquisition Date and
subsequent changes in the fair value are recognized in earnings. The TRA will
generally provide for the payment by
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 consist of developed technology, customer relationships and internal-use software modifications over their expected period of use.
Non-Operating Expenses
Interest Expense
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Interest expense consists of interest and other charges paid in connection with
our Senior Secured Credit Facility and our Senior
Income Tax Expense We are subject to federal and state income taxes inthe United States .
Results of Operations
The following tables set forth our consolidated statement of operations (in
thousands):
Three Months Ended
March 31, Increase/(Decrease)
2021 2020 $ %
Revenue $ 245,932 $ 437,718 $ (191,786) (44) %
Cost of Revenue 202,074 319,302 (117,228) (37) %
Gross profit 43,858 118,416 (74,558) (63) %
Operating Expenses
General and administrative 24,673 11,707 12,966 111 %
Contingent consideration 148 (1,013) 1,161 (115) %
Depreciation and amortization 5,984 6,374 (390) (6) %
Total Operating Expenses 30,805 17,068 13,737 80 %
Income from Operations 13,053 101,348 (88,295) (87) %
Other Expense
Other income (expense), net (78) 108 (186) (172) %
Interest expense (9,009) (5,229) (3,780) 72 %
Total Other Expense (9,087) (5,121) (3,966) 77 %
Income Before Income Tax Expense 3,966 96,227 (92,261) (96) %
Income Tax Expense 1,079 22,542 (21,463) (95) %
Net Income $ 2,887 $ 73,685 $ (70,798) (96) %
Comparison of three months ended
Revenue
Revenue decreased by
Cost of Revenue and Gross Profit
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Cost of revenue decreased by
Operating Expenses:
General and Administrative
General and administrative expenses increased by
Contingent Consideration
Contingent consideration expense increased by
Depreciation
Depreciation expense for the three months ended
Amortization of Intangibles
Amortization of intangibles for the three months ended
Interest Expense
Interest expenses increased by
Income Tax Expense
Income tax expense decreased by
Liquidity and Capital Resources
Historical Cash Flow
The following table compares the historical cash flow (in thousands):
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Three Months Ended March 31,
2021 2020
Net cash used in operating activities $ (42,148) $ (200,576)
Net cash used in investing activities (10,570) (168)
Net cash used in financing activities (36,590) (57,692)
Net decrease in cash, cash equivalents and restricted
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 our gross margins as well as our ability to quickly turn our working capital. Based on our past performance and current expectations, we believe that operating cash flows and our availability under our Revolving Credit Facility will be sufficient to meet our future cash needs to fund operations.
As of
As of
Operating Activities
For the three months ended
For the three months ended
Investing Activities
For the three months ended
Financing Activities
For the three months ended
For the three months ended
Debt Obligations
Senior Secured Credit Facility
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On
Letters of Credit
Under the Revolving Credit Facility, the Company had no outstanding balance,
Interest Rate
The interest rates applicable to the loans under the Term Loan Facility equal,
at our option, either, (i) in the case of ABR borrowings, the highest of (a) the
Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and
(c) the adjusted LIBOR rate as of such day for a deposit in
The interest rates applicable to the loans under the Revolving Facility equal,
at our option, either, (i) in the case of ABR borrowings, the highest of (a) the
Federal Funds Rate as of such day plus 50 basis points, (b) the prime rate and
(c) the adjusted LIBOR rate as of such day for a deposit in
The Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% per annum of the original principal amount of the loans funded thereunder. There is no scheduled amortization under the Revolving Credit Facility.
Off-Balance Sheet Arrangements
As of
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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. .
Critical Accounting Policies and Significant Management Estimates
Equity-Based Compensation
The Company granted restricted stock units (RSU's) to employees and Performance Stock Units (PSUs) to certain executives. The PSUs contain performance and market conditions. The PSU grants were valued using the Monte Carlo simulation method and the assigned fair value on grant date will be recognized on a straight-line basis over the vesting term of the awards. The probability of the awards meeting the performance related vested conditions is not included in the grant date fair value, but rather will be estimated quarterly and the Company will true-up the expense recognition accordingly upon any probability to vest revision. The Company accounts for forfeitures as they occur.
The Class
As of
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