In March 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted the final rule under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors. The rule would require registrants to disclose certain climate-related information in registration statements and annual reports. In April 2024, the SEC voluntarily stayed the final rule as a result of pending legal challenges. The disclosure requirements would apply to the Company’s fiscal year beginning January 1, 2025, pending resolution of the stay. The Company is currently evaluating the final rule to determine its impact on the Company’s disclosures.
Immaterial Correction of 2023 Interim Period Condensed Consolidated Financial Statements
Capped Calls
In connection with the pricing of the Convertible Notes, we entered into capped call transactions with the Option Counterparties. At issuance the Company concluded that the Capped Calls met the criteria for equity classification because they are indexed to the Company’s common stock and the Company has discretion to settle the Capped Calls in shares or cash. As a result, the amount paid for the Capped Calls was recorded as a reduction to additional paid-in capital. When the Company entered into the Capped Calls, the Company executed certain side letters (the “Side Letters”) with the counterparties that replaced some of the terms described in the primary contract including the volatility inputs used to value the Capped Calls under certain circumstances. Upon further evaluation of the accounting during the three months ended March 31, 2023, the Company concluded that the modification to the volatility inputs in the side letters precluded the Capped Calls from being accounted for as an equity instrument indexed to its own stock and should be accounted for as a freestanding derivative instrument asset recognized at fair value, with subsequent changes in fair value recognized in earnings. During the three months ended March 31, 2023, the Company began to account for the Capped Calls as derivative assets, with subsequent changes in fair value being recorded through earnings. During the three months ended December 31, 2023, after consultation with the staff of the Office of the Chief Accountant of the SEC, the Company concluded that the original equity classification accounting treatment was acceptable. As a result, the Company reclassified the derivative asset recognized at September 30, 2023, as a reduction to equity and reversed the related mark to market adjustments recognized during the nine months ended September 30, 2023.
Redeemable Perpetual Preferred Stock
At issuance, the Company evaluated the accounting for the instruments issued pursuant to the SPA and determined the Series A Shares and common stock issued in the Initial Closing, as well as the Prepaid Forward Contract, and Put Option are freestanding instruments that are classified in equity. During the first quarter of 2023, the Company reconsidered the provisions of the Put Option and concluded that it should be accounted for as a freestanding derivative instrument asset accounted for at fair value with subsequent fair value adjustments recognized in earnings. During the fourth quarter of 2023, after consultation with the staff of the Office of the Chief Accountant of the SEC, the Company concluded that the original equity accounting classification was correct. As a result, the Company reclassified the derivative asset recognized during the nine months ended September 30, 2023, as a reduction of equity and also reversed the related fair value adjustments.
15
Management evaluated the above misstatements and concluded they were not material to the nine months ended September 30, 2023, individually or in aggregate.
The following tables reflect the effects of the correction on all affected line items of the Company’s previously reported condensed consolidated financial statements to be presented as comparative in the Form 10-Q for the nine months ended September 30, 2024:
Condensed Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 2023
Nine Months Ended September 30, 2023
(in thousands)
As Previously Reported
Adjustments
As Corrected
As Previously Reported
Adjustments
As Corrected
Change in fair value of derivative assets
$
116
$
(116)
$
—
$
(1,140)
$
1,140
$
—
Total other income (expense)
(9,762)
(116)
(9,878)
(30,242)
1,140
(29,102)
Income (loss) before income tax expense
30,443
(116)
30,327
153,662
1,140
154,802
Income tax expense (benefit)
7,229
—
7,229
39,508
(2,604)
36,904
Net income (loss)
23,214
(116)
23,098
114,154
3,744
117,898
Net income (loss) to common shareholders
10,123
(116)
10,007
75,795
3,744
79,539
Income per common share
Basic
$
0.07
$
—
$
0.07
$
0.50
$
0.02
$
0.52
Diluted
$
0.07
$
—
$
0.07
$
0.50
$
0.02
$
0.52
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
Three Months Ended September 30, 2023
Nine Months Ended September 30, 2023
(in thousands)
As Previously Reported
Adjustments
As Corrected
As Previously Reported
Adjustments
As Corrected
Net income (loss)
$
23,214
$
(116)
$
23,098
$
114,154
$
3,744
$
117,898
Comprehensive income (loss)
$
719
$
(116)
$
603
$
129,443
$
3,744
$
133,187
16
Condensed Consolidated Statements of Changes in Redeemable Perpetual Preferred Stock and Stockholders’ Equity (unaudited)
Three Months Ended September 30, 2023
(in thousands)
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders’ Equity
As Previously Reported
Balance at June 30, 2023
$
417,624
$
(176,530)
$
287,454
Net income
—
23,214
23,214
Balance at September 30, 2023
407,916
(153,316)
278,465
Adjustments
Balance at June 30, 2023
(52,914)
3,860
(49,054)
Net loss
—
(116)
(116)
As Corrected
Balance at June 30, 2023
364,710
(172,670)
238,400
Net income
—
23,098
23,098
Balance at September 30, 2023
$
355,002
$
(149,572)
$
229,295
Nine Months Ended September 30, 2023
(in thousands)
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders’ Equity
As Previously Reported
Balance at December 31, 2022
$
383,176
$
(267,470)
$
124,281
Correction of the Capped Call and Put Option errors
52,914
—
52,914
Net income
—
114,154
114,154
Balance at September 30, 2023
407,916
(153,316)
278,465
Adjustments
Correction of the Capped Call and Put Option errors
(52,914)
—
(52,914)
Net income
—
3,744
3,744
As Corrected
Balance at December 31, 2022
383,176
(267,470)
124,281
Correction of the Capped Call and Put Option errors
—
—
—
Net income
—
117,898
117,898
Balance at September 30, 2023
$
355,002
$
(149,572)
$
229,295
17
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2023
(in thousands)
As Previously Reported
Adjustments
As Corrected
Net income
$
114,154
$
3,744
$
117,898
Deferred tax expense (benefit)
284
(2,612)
(2,328)
Change in fair value of derivative assets
1,140
(1,140)
—
Income tax payable
$
(738)
$
8
$
(730)
3.Inventories
Inventories consisted of the following (in thousands):
September 30, 2024
December 31, 2023
Raw materials
$
47,389
$
86,614
Finished goods
148,308
75,350
Inventories
$
195,697
$
161,964
The Company values a portion of its inventory using the moving average cost method that approximates the first-in, first-out method (“FIFO”). As of September 30, 2024, inventory valued using moving average cost and FIFO was $154.6 million and $41.1 million, respectively. As of December 31, 2023, inventory valued using moving average cost and FIFO, was $129.5 million and $32.5 million, respectively.
4.Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following (in thousands, except useful lives):
Estimated Useful Lives (Years)
September 30, 2024
December 31, 2023
Land
N/A
$
1,647
$
1,634
Buildings and land improvements
15-39
9,504
9,344
Manufacturing equipment
7
28,099
22,962
Furniture, fixtures and equipment
5-7
4,900
4,770
Vehicles
5
625
688
Hardware
3-5
3,879
3,114
Construction in progress
N/A
2,941
6,199
Total
51,595
48,711
Less: accumulated depreciation
(23,966)
(20,818)
Property, plant and equipment, net
$
27,629
$
27,893
Depreciation expense was $1.3 million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively, of which $0.7 million and $0.4 million, respectively, was included in cost of product and service revenue and $0.6 million and $0.3 million, respectively, was included in depreciation and amortization on the accompanying condensed consolidated statements of operations.
18
Depreciation expense was $3.3 million and $1.9 million for the nine months ended September 30, 2024 and 2023, respectively, of which $1.6 million and $1.0 million, respectively, was included in cost of product and service revenue and $1.7 million and $0.9 million, respectively, was included in depreciation and amortization on the accompanying condensed consolidated statements of operations.
5. Goodwill and Other Intangible Assets, Net
Goodwill
Changes in the carrying amount of goodwill by operating segment during the nine months ended September 30, 2024, consisted of the following (in thousands):
Array Legacy Operations
STI Operations
Total
Beginning balance
$
69,727
$
365,864
$
435,591
Foreign currency translation
—
(22,718)
(22,718)
Impairment charge
—
(162,000)
(162,000)
Ending balance (1)
$
69,727
$
181,146
$
250,873
(1) Goodwill attributable to Array Legacy Operations is net of cumulative impairments of $51.9 million.
During the three months ended September 30, 2024, the Company experienced a sustained decline in its stock price, which hit a 52-week low during the quarter, resulting in a decrease in market capitalization. In addition, the Company updated its long-term projections for the Company’s reporting units and further evaluated the execution risk associated with the Company’s projections. As a result, the Company identified indicators of impairment related to the Company’s reporting units. Management, with the assistance of a third-party valuation specialist, performed an interim quantitative goodwill impairment test of the Array Legacy Operations and STI Operations reporting unit as of September 30, 2024.
The fair value of the Array Legacy Operations and STI Operations reporting unit were determined using the income approach and then compared to the Guideline publicly traded companies (“GPC”) marketplace EBITDA multiples to corroborate the fair value of the reporting unit. As a result of these tests, the Company recorded an impairment of goodwill of $162.0 million related to STI Operations based on an estimated fair value of the STI Operations reporting unit of $455.9 million. Subsequent to recording the impairment of goodwill, the Company reconciled the overall market capitalization of the Company, within a reasonable range, to the sum of the estimated fair values of both of the Company’s reporting units. The estimated fair value of the Array Legacy Operations reporting unit was significantly higher than the carrying balance of the reporting unit.
The significant assumptions used in determining the fair value of the STI Operations reporting unit primarily relate to the revenue growth rate, the forecasted EBITDA margin, and the selected discount rate used in the discounted cash flow model under the income approach. Under the GPC method, the selection of EBITDA multiple to be used requires significant judgement. To the extent that the discount rate used in determining the present value of our cash flows increases, if we do not meet the cash flow projections for the reporting unit, or GPC multiples in the future decrease, additional impairment charges may be recorded in the future. In addition, a further decrease in the Company’s common stock share price and market capitalization could be an indication that there has been a further decrease in the fair value of the Company’s reporting units.
19
Long Lived Assets
As discussed above, there were indicators of impairment that required an interim impairment test for the Legacy Array and STI Operations reporting units. Management considered these events to be a triggering event requiring the long-lived assets associated with the STI Operations reporting unit be tested for impairment (which includes the amortizable intangible assets) as of September 30, 2024. Because the sum of future undiscounted cash flows for the underlying asset groups indicated that the carrying amount of the asset groups were recoverable, no impairment charge was recorded. The difference between the undiscounted cash flows of the Company’s reporting groups and carrying balance of its reporting groups was significant as of September 30, 2024.
As of September 30, 2024, no events or circumstances were noted that would indicate the carrying amount of any of Legacy Array’s asset groups may not be recoverable.
Other Intangible Assets, Net
Other intangible assets consisted of the following (in thousands, except useful lives):
Estimated Useful Lives (Years)
September 30, 2024
December 31, 2023
Amortizable:
Developed technology
14
$
203,800
$
203,800
Computer software
3
1,245
5,267
Customer relationships
10
320,489
336,134
Backlog
1
50,605
54,438
Trade name
20
26,000
27,061
Total amortizable intangibles
602,139
626,700
Accumulated amortization:
Developed technology
119,822
108,905
Computer software
522
1,274
Customer relationships
136,354
115,444
Backlog
50,605
54,322
Trade name
3,537
2,666
Total accumulated amortization
310,840
282,611
Total amortizable intangibles, net
291,299
344,089
Non-amortizable:
Trade name
10,300
10,300
Total other intangible assets, net
$
301,599
$
354,389
Amortization expense related to intangible assets was $11.9 million and $12.8 million for the three months ended September 30, 2024 and 2023, respectively, of which $3.6 million was included in amortization of developed technology, a component of cost of revenue, in both periods and $8.3 million and $9.2 million, respectively, was included in depreciation and amortization, on the accompanying condensed consolidated statements of operations.
20
Amortization expense related to intangible assets was $36.6 million and $39.3 million for the nine months ended September 30, 2024 and 2023, respectively, of which $10.9 million was included in amortization of developed technology, a component of cost of revenue, in both periods and $25.7 million and $28.4 million, respectively, was included in depreciation and amortization, on the accompanying condensed consolidated statements of operations.
Estimated future amortization expense of intangible assets as of September 30, 2024, is as follows (in thousands):
Amount
Remainder of 2024
$
11,987
2025
47,946
2026
43,635
2027
39,041
2028
39,041
Thereafter
109,649
$
291,299
6.Income Taxes
The Company follows guidance under ASC Topic 740-270 Income Taxes, which requires that an estimated annual effective tax rate is applied to year-to-date ordinary income (loss). At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. The tax effect of discrete items is recorded in the quarter in which the discrete events occur.
The Company recorded income tax expense of $3.9 million and $7.2 million for the three months ended September 30, 2024 and 2023, respectively, and an expense of $13.0 million and $36.9 million for the nine months ended September 30, 2024 and 2023, respectively. The income tax expense for the nine months ended September 30, 2024 was favorably impacted by lower profits in non-US jurisdictions and additional tax credits recorded during the period. This was partially offset by legislative changes in Brazil where a local tax incentive is no longer being exempt from Federal income tax beginning in 2024. Additionally, tax expense of $0.5 million related to equity-based compensation, was recorded discretely. No tax benefit was recorded on the goodwill impairment recorded in the nine months ended September 30, 2024, as the goodwill is non-deductible for income tax purposes. The tax expense for the nine months ended September 30, 2023, was unfavorably impacted by higher income reported in non-U.S. jurisdictions, offset by a tax benefit of $1.2 million related to equity-based compensation recorded discretely.
For the nine months ended September 30, 2024 and 2023, no reserves for uncertain tax positions have been recorded. The Company will continue to monitor this position each interim period.
21
7.Debt
The following table summarizes the Company’s total debt (in thousands):
September 30, 2024
December 31, 2023
Senior Secured Credit Facility:
Term loan facility
$
234,950
$
238,175
Revolving credit facility
—
—
Total secured credit facility
234,950
238,175
Convertible notes
425,000
425,000
Other debt
33,038
39,889
Total principal
692,988
703,064
Unamortized discount and issuance costs, total
(16,615)
(20,644)
Current portion of debt
(28,055)
(21,472)
Total long-term debt, net of current portion
$
648,318
$
660,948
Senior Secured Credit Facility
On October 14, 2020, the Company entered into a credit agreement (as amended, the “Credit Agreement”) governing the Company’s senior secured credit facility, consisting of (i) a $575 million senior secured 7-year term loan facility (the “Term Loan Facility”) and (ii) a $200 million senior secured 5-year revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Secured Credit Facility”). The Credit Agreement was amended on February 23, 2021 (the “First Amendment”), on February 26, 2021 (the “Second Amendment”) and again on March 2, 2023 (the “Third Amendment”).
Revolving Credit Facility
The Company had no outstanding balance under the Revolving Credit Facility at September 30, 2024 and December 31, 2023. At September 30, 2024 and December 31, 2023 the Company had $16.4 million and $24.8 million, respectively, in standby letters of credit, and $183.6 million and $175.2 million, respectively, available to withdraw. In accordance with the Third Amendment, the Revolving Credit Facility pays interest at the Company’s election, at either (x) for SOFR Loans at Adjusted Term SOFR (as defined in the Credit Agreement) plus 3.25% or (y) for Base Rate Loans at the higher of the Prime Rate, one half of 1.00% above the Federal Funds Rate or the Adjusted Term SOFR for one-month interest period, after giving effect to any floor plus 1.00%, plus 2.25%.
Term Loan Facility
The outstanding balance on the Term Loan Facility was $235.0 million and $238.2 million as of September 30, 2024 and December 31, 2023, respectively. The Term Loan Facility is presented in the accompanying condensed consolidated balance sheets, net of debt discount and issuance costs of $8.7 million and $11.3 million as of September 30, 2024 and December 31, 2023, respectively. In accordance with the Third Amendment, the Term Loan Facility pays interest at the Company’s election, at either (x) for SOFR Loans at Adjusted Term SOFR (subject to a floor of 0.50%) plus 3.25% or (y) for Base Rate Loans at the higher of the Prime Rate, one half of 1.00% above the Federal Funds Rate or the Adjusted Term SOFRfor one-month interest period, after giving effect to any floor plus 1.00%, plus 2.25%. The debt discount and issuance costs
22
are being amortized using the effective interest method and the effective interest rate of the Term Loan Facility as of September 30, 2024, was 10.20%. The Term Loan Facility has an annual excess cash flow calculation, for which the prescribed formula did not result in requiring the Company to make an advance principal payment for the year ended December 31, 2023.
Convertible Notes
On December 3, 2021 and December 9, 2021, the Company completed a $425 million private offering ($375 million and $50 million, respectively), of its 1.00% Convertible Senior Notes due 2028 (the “Convertible Notes”), resulting in proceeds of $413.3 million ($364.7 million and $48.6 million, respectively), after deducting the original issue discount of 2.75%. The Convertible Notes were issued pursuant to an indenture, dated December 3, 2021, between the Company and U.S. Bank National Association, as trustee.
The Convertible Notes are senior unsecured obligations of the Company and will mature on December 1, 2028, unless earlier converted, redeemed, or repurchased. The Convertible Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022. As of September 30, 2024 and December 31, 2023, the principal balance of the Convertible Notes was $425.0 million with unamortized discount and issuance costs of $8.0 million and $9.4 million, respectively, for a net carrying amount of $417.0 million and $415.6 million, respectively.
The conversion rate for the Convertible Notes was initially 41.9054 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which was equivalent to an initial conversion price of approximately $23.86 per share of common stock or 10.1 million shares of common stock. The Convertible Notes were not convertible during the nine months ended September 30, 2024, and none have been converted to date. Also, given that the average market price of the Company’s common stock has not exceeded the exercise price since inception, there was no dilutive impact for the three and nine months ended September 30, 2024.
Capped Calls
In connection with the issuances of the Convertible Notes, the Company paid $52.9 million, in aggregate, to enter into capped call option agreements to reduce the potential dilution to holders of the Company’s common stock after a conversion of the Convertible Notes. Specifically, upon the exercise of the capped call instruments issued pursuant to the agreements (the “Capped Calls”), the Company would receive shares of its common stock equal to approximately 17.8 million shares (a) multiplied by (i) the lower of $36.0200 or the then-current market price of its common stock, less (ii) the applicable exercise price, $23.86, and (b) divided by the then-current market price of its common stock. The results of this formula are that the Company would receive more shares as the market price of its common stock exceeds the exercise price and approaches the cap, which was initially, and remains currently, $36.02 per share.
Consequently, if the Convertible Notes are converted, then the number of shares to be issued by the Company would be effectively partially offset by the shares of common stock received by the Company under the Capped Calls as they are exercised. The formula above would be adjusted in the event of certain specified extraordinary events affecting the Company, including: a merger; a tender offer; nationalization, insolvency or delisting of the Company’s common stock; changes in law; failure to deliver; insolvency filing; stock splits, combinations, dividends, repurchases or similar events; or an announcement of certain of the preceding actions.
23
The Company can also elect to receive the equivalent value of cash in lieu of shares of common stock upon settlement, except in certain circumstances. The Capped Calls expire on December 1, 2028, and terminate upon the occurrence of certain extraordinary events such as a merger, tender offer, nationalization, insolvency, delisting, event of default, a change in law, failure to deliver, an announcement of certain of these events, or an early conversion of the Convertible Notes. Although intended to reduce the net number of shares of common stock issued after a conversion of the Convertible Notes, the Capped Calls were separately negotiated transactions, are not a part of the terms of the Convertible Notes, and do not affect the rights of the holders of the Convertible Notes. See Note 2 – Summary of Significant Accounting Policies for information regarding the accounting for the Capped Calls.
Other Debt
Other debt consists of the debt obligations of STI (“Other Debt”) and the $33.0 million balance is denominated in Euros. Interest rates on other debt range from 3.63% to 4.53% annually.
8.Redeemable Perpetual Preferred Stock
Series A Redeemable Perpetual Preferred Stock
The Company entered into a Securities Purchase Agreement (the “SPA”) with certain investors (the “Purchasers”) pursuant to which, on August 11, 2021, the Company issued 350,000 shares of its newly designated Series A Redeemable Perpetual Preferred Stock (the “Series A Shares”) and 7,098,765 shares of the Company’s common stock for an aggregate purchase price of $346.0 million (the “Initial Closing”). Further, pursuant to the SPA, on September 27, 2021, the Company issued and sold to the Purchasers 776,235 shares of common stock for an aggregate purchase price of $776 (the “Prepaid Forward Contract”). The Company used the net proceeds from the initial Closing to repay the $102.0 million outstanding balance under its existing Revolving Credit Facility and prepay $100.0 million of the Company’s Term Loan Facility. The Series A Shares have no maturity date.
The Put Option included in the SPA required the Purchasers to purchase up to an additional 150,000 shares of Series A Shares and up to 3,375,000 shares of common stock (or up to 6,100,000 shares of common stock in the event of certain price-related adjustments) until June 30, 2023, subject to certain equitable adjustments pursuant to any stock dividend, stock split, stock combination, reclassification or similar transaction, for an aggregate purchase price up to $148.0 million (the “Delayed Draw Commitment” or the “Put Option”). The Put Option expired effective June 30, 2023.
On January 7, 2022, pursuant to the Put Option, the Company issued and sold to the Purchasers 50,000 shares of Series A Shares and 1,125,000 shares of the Company’s common stock in an additional closing for an aggregate purchase price of $49.4 million (the “Additional Closing”).
The Company has classified the Series A Shares as 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 $20.4 million and $18.8 million for the nine months ended September 30, 2024 and 2023, respectively.
Dividends
On or prior to the fifth anniversary of the Initial Closing, the Company may pay dividends on the Series A Shares either in (i) cash at the then-applicable Cash Regular Dividend Rate (as defined below), (ii) through
24
accrual to the Liquidation Preference at the Accrued Regular Dividend Rate of 6.25% (the “Permitted Accrued Dividends”), or (iii) a combination thereof. Following the fifth anniversary of the Initial Closing, dividends are payable only in cash. To the extent the Company does not declare such dividends and pay in cash following the fifth anniversary of the Initial Closing, the dividends accrue to the Liquidation Preference (“Default Accrued Dividends”) at the then-applicable Cash Regular Dividend Rate plus 200 basis points. In the event there are Default Accrued Dividends outstanding for six consecutive quarters, the Company, at the option of the holders of the Series A Shares, will pay 100% of the amount of Default Accrued Dividends by delivering to such holder a number of shares of the Company’s common stock equal to the quotient of (i) the amount of Default Accrued Dividends divided by (ii) 95% of the 30-day VWAP of the Company’s common stock (“Non-Cash Dividend”).
The “Cash Regular Dividend Rate” of the Series A Shares means (i) initially, 5.75% per annum on the Liquidation Preference and (ii) increased by (a) 50 basis points on each of the fifth, sixth and seventh anniversaries of the Initial Closing and (b) 100 basis points on each of the eighth, ninth and tenth anniversaries of the Initial Closing. The “Accrued Regular Dividend Rate” on the Series A Shares means 6.25% per annum on the Liquidation Preference.
As used herein, “Liquidation Preference” means, with respect to the Series A Shares, the initial liquidation preference of $1,000 per share, plus accrued dividends of such share at the time of the determination.
During the nine months ended September 30, 2024, the Company accrued dividends on the Series A Shares at the Accrued Regular Dividend rate of 6.25% totaling $20.9 million. As of September 30, 2024, total accrued and unpaid dividends were $53.7 million.
The Series A Shares have similar characteristics of an “Increasing Rate Security” as described by SEC Staff Accounting Bulletin Topic 5Q, Increasing Rate Preferred Stock. As a result, the discount on Series A Shares is considered an unstated dividend cost that is amortized over the period preceding commencement of the perpetual dividend using the effective interest method, by charging imputed dividend cost against retained earnings, or additional paid in capital in the absence of retained earnings, and increasing the carrying amount of the Series A Shares by a corresponding amount. Accordingly, the discount is amortized over five years using the effective yield method.
Fees
During the three months ended June 30, 2023, the Company paid the Purchasers a per annum cash commitment fee totaling $1.5 million on the unpurchased portion of the Put Option. The Put Option expired effective June 30, 2023.
25
9.Revenue
The Company disaggregates its revenue from contracts with customers by sales recorded over time and sales recorded at a point in time. The following table presents the Company’s disaggregated revenues (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Over-time revenue
$
174,128
$
321,154
$
508,062
$
1,120,526
Point in time revenue
57,278
29,284
132,513
114,410
Total revenue
$
231,406
$
350,438
$
640,575
$
1,234,936
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (“contract assets”), and deferred revenue (“contract liabilities”) on the condensed consolidated balance sheets. The majority of the Company’s contract amounts are billed as work progresses, in accordance with agreed-upon contractual terms, which generally coincide with the shipment of one or more phases of the project. For certain customer contracts, billing can occur in advance of shipment, resulting in contract liabilities.Billing sometimes occurs subsequent to revenue recognition, resulting in contract assets. The changes in contract assets and the corresponding amounts recorded in revenue relate to fluctuations in the timing and volume of billings.
Contract assets consisting of unbilled receivables are recorded within accounts receivable, net on the condensed consolidated balance sheets on a contract-by-contract basis at the end of the reporting period and consisted of the following (in thousands):
September 30, 2024
December 31, 2023
Unbilled receivables
$
77,492
$
102,603
The Company also receives advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities recorded within Deferred revenue. The changes in contract liabilities relate to advanced orders and payments received by the Company.
Contract liabilities are recorded on a contract-by-contract basis and consisted of the following at the end of each reporting period (in thousands):
September 30, 2024
December 31, 2023
Deferred revenue
$
112,618
$
66,488
During the nine months ended September 30, 2024, the Company converted $37.6 million in deferred revenue to revenue, which represented 56.7% of the prior year’s deferred revenue balance. Included in deferred revenue as of December 31, 2023 are cash advances for signed contracts that begin several months subsequent to receiving the advance. In addition, deferred revenue includes paid extended warranty, that can be recognized upon expiration of the warranty.
26
Bill-and-Hold Arrangements
Revenue recognized for the Company’s federal investment tax credit (“ITC”) contracts and standalone system component sales is recorded at a point in time and recognized when obligations under the terms of the contract with the Company’s customer are satisfied. Generally, this occurs with the transfer of control of the asset, which is typically upon delivery to the customer in line with shipping terms.
In certain situations, the Company recognizes revenue under a bill-and-hold arrangement with its customers. An example of such a situation is when customers purchase material prior to the start of construction of a solar project in order to meet the Five Percent Safe Harbor test to qualify for the ITC. Because the customers lack sufficient storage capacity to accept a large amount of material prior to the start of construction, they request that the Company keep the product in its custody. All bill-and-hold inventory is bundled or palletized in the Company’s warehouses, separately identified as not belonging to the Company and ready for immediate transport to the customer project upon request. Additionally, title and risk of loss has passed to the customer and the Company does not have the ability to use the product or direct it to another customer.
During the three and nine months ended September 30, 2024, the Company recognized zero and $1.9 million, respectively, in revenue from one customer for the sale of goods and services under bill-and-hold arrangements. During the three and nine months ended September 30, 2023, the Company recognized zero and $22.8 million, respectively, in revenue from one customer for the sale of goods and services under bill-and-hold arrangements.
Remaining Performance Obligations
As of September 30, 2024, the Company had $466.9 million of remaining performance obligations. The Company expects to recognize revenue on 94% of these performance obligations in the next twelve months.
10. Earnings Per Share
The following table sets forth the computation of basic and diluted (loss) income per share (in thousands, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net (loss) income
$
(141,354)
$
23,098
$
(113,491)
$
117,898
Less: preferred dividends and accretion
14,080
13,091
41,332
38,359
Net (loss) income to common shareholders
$
(155,434)
$
10,007
$
(154,823)
$
79,539
Basic:
Weighted average shares
151,923
151,068
151,691
150,865
(Loss) income per share
$
(1.02)
$
0.07
$
(1.02)
$
0.52
Diluted:
Effect of restricted stock and performance awards
—
1,255
—
1,219
Weighted average shares
151,923
152,323
151,691
152,083
Income per share
$
(1.02)
$
0.07
$
(1.02)
$
0.52
27
Since the Company was in a loss position for the three and nine months ended September 30, 2024, basic net loss per share to common shareholders is the same as diluted net loss per share to common stockholders, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. At September 30, 2024 and 2023, 3,834,690 and 34,634 respectively, of common stock equivalents were excluded from the calculation of diluted net loss per share to common stockholders, as they had an antidilutive effect.
There were no potentially dilutive common shares issuable pursuant to the Convertible Notes for both the nine months ended September 30, 2024 and 2023, as the average market price of the Company’s common stock has not exceeded the exercise price since their issuance.
11.Commitments and Contingencies
Legal Proceedings
The Company, in the normal course of business, is subject to claims and litigation. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company would accrue a liability for the estimated loss.
On May 14, 2021, a putative class action was filed in the U.S. District Court for the Southern District of New York against the Company and certain officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, and Sections 11, 12(a)(2) and 15 of the Securities Exchange Act of 1933 (“Plymouth Action”). The complaint alleges misstatements and/or omissions in the Company’s registration statements and prospectuses related to the Company’s October 2020 initial public offering (“IPO”), the Company’s December 2020 offering, and the Company’s March 2021 offering during the putative class period of October 14, 2020 through May 11, 2021. A consolidated amended class action complaint was filed on December 7, 2021, with additional allegations regarding misstatements and/or omissions in: (1) in the Company’s Annual Report on Form 10-K and associated press release announcing results for the fourth quarter and full fiscal year 2020; and (2) in the Company’s November 5, 2020, and March 9, 2021, earnings calls.
On June 30, 2021, a substantially similar second putative class action was filed in the Southern District of New York against the Company and certain officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated thereunder, and Sections 11 and 15 of the Securities Exchange Act of 1933 (“Keippel Action”), which was consolidated with the Plymouth Action.
All Defendants in the Plymouth Action, including the Company, moved to dismiss the consolidated amended complaint. On May 19, 2023, the Court granted the Company’s motion to dismiss and, on July 5, 2023, denied a request from the Plymouth Action plaintiffs for leave to amend the consolidated amended complaint and dismissed the Plymouth Action in its entirety with prejudice.
On August 4, 2023, the lead plaintiffs filed a notice of appeal of the Court’s dismissal of the consolidated amended complaint to the U.S. Court of Appeals for the Second Circuit. After full briefing, the Court of Appeals heard oral argument on June 26, 2024 and the case is pending decision by the Court.
On July 16, 2021, a verified derivative complaint was filed in the Southern District of New York against certain officers and directors of the Company. The complaint alleges: (1) violations of Section 14(a) of the Securities
28
Exchange Act of 1934 for misleading proxy statements, (2) breach of fiduciary duty, (3) unjust enrichment, (4) abuse of control, (5) gross mismanagement, (6) corporate waste, (7) aiding and abetting breach of fiduciary duty, and (8) contribution under sections 10(b) and 21D of the Securities Exchange Act of 1934. On July 30, 2021, a second verified derivative complaint was filed in the Southern District of New York against certain officers and directors of the Company. The complaint alleges: (1) violations of Section 14(a) of the Securities Exchange Act of 1934 for causing the issuance of a false/misleading proxy statement, (2) breach of fiduciary duty, and (3) aiding and abetting breaches of fiduciary duty.
On August 24, 2021, the Southern District of New York derivative actions were consolidated and the Court appointed co-lead counsel. The consolidated cases remain stayed pending the outcome of the appeal of the Plymouth Action.
On August 3, 2022, a verified derivative complaint was filed in the Court of Chancery of the State of Delaware against certain officers and directors of the Company, asserting claims for: (1) breach of fiduciary duty and (2) unjust enrichment. On August 11, 2022, a second verified derivative complaint was filed against certain officers and directors of the Company Court of Chancery, asserting claims for: (1) breach of fiduciary duty; (2) aiding and abetting breaches of fiduciary duty; (3) waste of corporate assets; (4) unjust enrichment; (5) insider selling; and (6) aiding and abetting insider selling.
On September 2, 2022, the Chancery Court derivative cases were consolidated and the Court appointed co-lead counsel. The consolidated cases have been stayed pending the outcome of the appeal of the Plymouth Action.
At this time the Company believes that the likelihood of any material loss related to these matters is remote given the preliminary stage of the claims and strength of the Company’s defenses. The Company has not recorded any material loss contingency in the condensed consolidated balance sheets as of September 30, 2024.
Commercial Supplier Settlement
During March 2024, the Company reached a settlement with one of its vendors, in which the Company received $4.0 million in the form of a one-time $2.6 million cash payment due immediately, and $1.4 million in credits with the vendor which can be applied by the Company to future orders from the respective vendor. If the Company does not utilize all of the credits by January 2026, it will receive a one-time cash payment from the vendor for the remaining unused credit balance. As of March 31, 2024, the Company recognized $4.0 million in Prepaid and other expenses, net on the condensed consolidated balance sheet and for the three months ended March 31, 2024, a $4.0 million reduction to Cost of revenue on the condensed consolidated statement of operations.
The Company is party to various other legal proceedings, claims, governmental and/or regulatory inspections, inquiries and investigations arising out of the ordinary course of its business. The Company believes that, there are no other proceedings or claims pending against it, the ultimate resolution of which could have a material adverse effect on its financial condition or results of operations. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies (ASC 450). Legal costs are expensed as incurred. It is
29
possible that future results for any particular quarter or annual period may be materially affected by changes in our assumption or the effectiveness of the Company’s strategies relating to these proceedings.
Contingent Consideration
Tax Receivable Agreement
Concurrent with the Former Parent’s acquisition of Array Technologies Patent Holdings Co., LLC on July 8, 2016, the Company’s operating subsidiary, Array Tech, Inc. (f/k/a Array Technologies, Inc.), entered into a Tax Receivable Agreement (the “TRA”) with the former majority shareholder of Array. The TRA is valued based on the future expected payments under the agreement. The TRA provides for the payment by Array Tech, Inc., to the former owners for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Array Tech, Inc., from the use of certain deductions generated by the increase in the tax value of the developed technology. The TRA is accounted for as contingent consideration and subsequent changes in fair value of the contingent liability are recognized in contingent consideration on the condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the fair value of the TRA was $8.7 million and $10.4 million, respectively.
Estimating the amount of payments that may be made under the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to the former owners 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.
Payments made under the TRA consider tax positions taken by the Company and are due within 125 days following the filing of the Company’s U.S. federal and state income tax returns under procedures described in the agreement. The current portion of the TRA liability is based on tax returns. The TRA will continue until all tax benefit payments have been made or the Company elects early termination under the terms described in the TRA.
The following table summarizes the activity related to the estimated TRA liability (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Beginning balance
$
8,704
$
9,429
$
10,363
$
8,587
Payments
—
—
(1,427)
(1,200)
Fair value adjustment
(39)
190
(271)
2,232
Ending balance
$
8,665
$
9,619
$
8,665
$
9,619
The TRA liability requires significant judgment and is classified as Level 3 in the fair value hierarchy.
Surety Bonds
As of September 30, 2024, the Company posted surety bonds in the total amount of $198.2 million. The Company is 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 the Company’s liquidity or capital resources.
30
12. Fair Value of Financial Instruments
The carrying values and estimated fair values of the Company’s debt financial instruments were as follows (in thousands):
September 30, 2024
December 31, 2023
Carrying Value
Fair Value
Carrying Value
Fair Value
Convertible Notes
$
417,049
$
314,500
$
415,632
$
416,500
The fair value of the Convertible Notes is estimated using Level 2 inputs, as they are not registered securities nor listed on any securities exchange but may be traded by qualified institutional buyers.
The fair value of the Term Loan Facility and Other Debt is estimated using Level 2 inputs. The carrying values of the Term Loan Facility outstanding under the Senior Secured Credit facility recorded in the condensed consolidated balance sheets approximate fair value due to the variable nature of the interest rates.
Other Debt with an aggregate carrying value of $33.0 million, consists only of variable rate obligations. The carrying value of these variable rate obligations approximate fair value due to the variable nature of the interest rates.
13.Equity-Based Compensation
2020 Equity Incentive Plan
On October 14, 2020, the Company’s 2020 Equity Incentive Plan (the “2020 Plan”) became effective. The 2020 Plan authorized 6,683,919 new shares, subject to adjustments pursuant to the 2020 Plan.
Restricted Stock Units
Pursuant to the 2020 Plan, the Company grants restricted stock units (“RSUs”) to employees and members of the Company’s board of directors. The fair value of the RSUs is determined using the market value of the Company’s common stock on the grant date.
RSU activity under the 2020 Plan during the nine months ended September 30, 2024, was as follows:
Number of Shares
Weighted Average Grant Date Fair Value
Outstanding non-vested, December 31, 2023
1,670,509
$
15.44
Shares granted
2,176,206
9.55
Shares vested
(708,036)
15.45
Shares forfeited
(318,594)
14.16
Outstanding non-vested, September 30, 2024
2,820,085
$
11.01
31
Performance Stock Units
The Company has granted performance stock units (“PSUs”) to certain employees. The PSUs cliff vest after three years and upon meeting certain revenue and adjusted EPS targets. The PSUs also contain a modifier based on the total stock return (“TSR”) compared to a certain index which modifies the number of PSUs that vest. The PSUs were valued using a Monte-Carlo simulation method on the date of grant based on the U.S. Treasury Constant Maturity rates. The following assumptions were used in the Monte Carlo simulation for computing the grant date fair value of the PSUs issued during the nine months ended September 30, 2024 and 2023:
2024
2023
Volatility
79
%
90
%
Risk-free interest rate
4.62
%
3.74
%
Dividend yield
—
%
—
%
PSU activity under the 2020 Plan during the nine months ended September 30, 2024, was as follows:
Number of Shares
Weighted Average Grant Date Fair Value
Outstanding non-vested, December 31, 2023
692,473
$
14.54
Shares granted
586,316
11.74
Shares vested
—
—
Shares forfeited
(264,184)
15.35
Outstanding non-vested, September 30, 2024
1,014,605
$
12.60
For three months ended September 30, 2024 and 2023, the Company recognized $2.0 million and $3.4 million, respectively, in equity-based compensation costs. For nine months ended September 30, 2024 and 2023, the Company recognized $6.9 million and $11.9 million, respectively, in equity-based compensation costs. At September 30, 2024, the Company had $24.9 million of unrecognized compensation costs related to RSUs and PSUs, which are expected to be recognized over 2.2 years and 2.3 years, respectively.
Deferred Compensation Plan
On May 21, 2024, the Human Capital Committee (the “Committee”) of the Board of Directors (the “Board”) of Array Technologies, Inc. adopted the Array Tech, Inc. Deferred Compensation Plan (the “Plan”). The Plan is a non-qualified deferred compensation plan intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Participation in the Plan is voluntary and is currently available to U.S. employees of the Company and its subsidiaries at the level of Vice President and above.
The Plan allows participants to defer up to 50% of their base salary and/or up to 100% of their cash incentive compensation. There is no maximum dollar limit on the amount that may be deferred by a participant in any year.
In addition, the Company will make a matching contribution to the Plan in respect of cash compensation that could not be recognized under the Company’s 401(k) plan due to the Code Section 401(a)(17) compensation limit ($0.3 million for 2024). The Plan matching contribution will be equal to the matching contribution for the Company’s 401(k) plan for the applicable year. Under the terms of the Plan, the Company may also provide discretionary contributions to participants annually as determined by the Committee. The participants are 100%
32
vested in the amount they defer, and any Company contributions will vest fully on the second anniversary of the date on which the Company contribution was made.
Compensation deferred pursuant to the Plan, along with any Company contributions to the Plan, may be invested by participants in various investment fund vehicles, which mirror the investment fund vehicles offered to participants as part of the Company’s 401(k) plan.
Compensation deferred pursuant to the Plan will be distributed in accordance with elections made by the participant. Participants may elect to receive distributions upon a separation from service or a specified date in the form of a lump sum payment or annual installment payments for up to ten years, for distributions following a separation from service, or five years, for distributions upon a specified date. Compensation deferred pursuant to the Plan may also be distributed in the form of a lump sum benefit in the event of the participant’s death, disability, or unforeseeable emergency that results in “severe financial hardship,” as contemplated by Section 409A of the Code.
The Plan does not require the Company to establish any trust, escrow account, or other mechanism to hold the participant deferrals and Company contributions. The obligations of the Company under the Plan are general unsecured obligations.
The Company may amend the Plan at any time, except that no such amendment or termination may adversely affect a participant’s right with respect to the amount of the participant’s accounts as of the date of such amendment or termination. The Company may terminate the Plan at any time, in accordance with the requirements of Section 409A of the Code, and pay the participants their vested amounts in a single lump sum or on a schedule determined by the Committee.
14 Segment Reporting
ASC 280 Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Historically, the Company managed its business on the basis of one operating and reportable segment. Concurrent with the acquisition of STI in January 2022, the Company began operating as two segments; Array Legacy Operations and STI Operations.
The following table provides a reconciliation of certain financial information for the Company’s reportable segments to information presented in its condensed consolidated financial statements for the three and nine months ended September 30, 2024 and 2023 (in thousands):
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, parts, software, and services. 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.
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 project mix between module type and wattage, geographic mix of our customers, strength of competitors’ product offerings, commodity prices and availability of government incentives to the end-users of our products.
Our revenue growth is dependent on continued growth in the size and number of solar energy projects installed each year, as well as our ability to maintain market share in each geography where we compete, expand our global footprint to new and evolving markets, grow our production capabilities to satisfy demand, and continue
39
to develop and introduce new innovative products that integrate emerging technologies and the performance requirements of our customers.
A majority of our revenue is recognized over time as work progresses, and for single performance obligations, we use an input measure, the cost-to-cost method, to determine progress. We review and update the contract related estimates on an ongoing basis and recognize adjustments for any project specific facts and circumstances that could impact the measurement of the extent of progress, such as the total costs to complete the contracts, under the cumulative catch-up method. Due to the relatively short duration of our outstanding performance obligations, and our ability to estimate the remaining costs to be incurred, which are substantially all material costs covered under our material supply agreements with our suppliers, we have not recorded any material catch-up adjustments for the periods presented that would have impacted revenues or EPS related to revisions in our measurement of remaining progress of our performance obligations.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of product costs, including raw materials, purchased components, salaries, wages and benefits of manufacturing personnel, freight, tariffs, customer support, product warranty, amortization of developed technology, and depreciation of manufacturing and testing equipment. Our product costs are affected by (i) the underlying cost of raw materials, including steel and aluminum, (ii) component costs, including electric motors and gearboxes, (iii) technological innovation, and (iv) economies of scale and improvements in production processes and automation. We may experience disruptions to our supply chain and increased material and freight costs like those experienced in 2021 and 2022 during the COVID-19 pandemic. When possible, we modify our production schedules and processes to mitigate the impact of these disruptions and cost increases on our margins. We do not currently hedge against changes in the price of our raw materials.
Gross profit may vary from quarter to quarter and is primarily affected by our volume, ASPs, product costs, project mix, customer mix, geographical mix, commodity prices, logistics rates, warranty costs, and seasonality.
Inflation Reduction Act Vendor Rebates
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law, which includes numerous green energy credits. The 45X Advanced Manufacturing Production Tax Credit (“45X Credit”) was established as part of the IRA. The 45X Credit is a per-unit tax credit that is earned over time for each clean energy component domestically produced and sold by a manufacturer. We have, and will continue to, enter into arrangements with manufacturing vendors that produce 45X Credit eligible parts, in which the vendors agree to share a portion of the benefit received related to our purchases, in the form of “Vendor Rebates.”
We account for these Vendor Rebates as a reduction of the purchase prices of the vendors’ products and therefore a reduction in the cost of inventory until the inventory is sold, at which time we recognize such rebates as a reduction of cost of product and service revenue on the condensed consolidated statements of operations. Rebates related to purchases that were made prior to the execution of the agreements are deferred and recognized as a reduction of the prices of future purchases.
Operating Expenses
General and administrative expense consists primarily of salaries, benefits, and equity-based compensation related to our executive, sales, engineering, finance, human resources, information technology, and legal personnel, as well as travel, facility costs, marketing, bad debt provision, and professional fees. The majority of our sales in the nine months ended September 30, 2024 and 2023, were in the U.S.; however, in January 2022, we expanded our international operations with the STI Acquisition. We currently have a sales presence
40
in the U.S., Spain, Brazil, South Africa, Australia, and the U.K. We intend to continue to expand our sales presence and marketing efforts to additional countries.
Contingent consideration consists of the changes in fair value of the tax receivable agreement (“TRA”) entered into with a former indirect stockholder, concurrent with the acquisition of Patent LLC by Former Parent. The TRA liability was recorded at fair value as of July 8, 2016 (the “Patent Acquisition Date”) and subsequent changes in the fair value are recognized in earnings. For discussion and analysis of the TRA see Note 11 – Commitments and Contingencies.
Depreciation consists of costs associated with property, plant and equipment 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 may require some additional property, plant and equipment to support this growth resulting in additional depreciation expense.
Amortization consists of the expense recognized over the expected period of use of our customer relationships, contractual backlog, and STI trade name intangible assets. Amortization related to certain acquired intangible assets is recorded as Total cost of revenue under the caption "Amortization of developed technology."
Non-Operating Expenses
Interest income consists of interest earned on our cash and cash equivalents balance.
Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Facility, the Convertible Notes, and Other Debt held by our STI Operations.
We are subject to U.S. federal, state and non-U.S. income taxes. As we expand into additional foreign markets, we may be subject to additional foreign tax.
Reportable Segments
Subsequent to the acquisition of STI, the Company began reporting its results of operations in two segments; the Array Legacy operating segment and the newly acquired STI Legacy operating segment (“STI Legacy Operations”) pertaining to legacy STI operations. The segment amounts included in this Item 2. Management’s Discussion and Analysis are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 14 – Segment Reporting in the accompanying notes to the condensed consolidated financial statements.
41
Results of Operations
The following table sets forth our consolidated statement of operations (in thousands, except percentages):
Three Months Ended September 30,
Increase/(Decrease)
Nine Months Ended September 30,
Increase/(Decrease)
2024
2023
$
%
2024
2023
$
%
Revenue
$
231,406
$
350,438
$
(119,032)
(34)
%
$
640,575
$
1,234,936
$
(594,361)
(48)
%
Cost of revenue
Cost of product and service revenue
149,452
259,419
(109,967)
(42)
%
410,299
892,696
(482,397)
(54)
%
Amortization of developed technology
3,639
3,640
(1)
—
%
10,918
10,918
—
—
%
Total cost of revenue
153,091
263,059
(109,968)
(42)
%
421,217
903,614
(482,397)
(53)
%
Gross profit
78,315
87,379
(9,064)
(10)
%
219,358
331,322
(111,964)
(34)
%
Operating expenses
General and administrative
40,149
37,432
2,717
7
%
114,904
115,825
(921)
(1)
%
Change in fair value of contingent consideration
(39)
190
229
121
%
(271)
2,232
2,503
112
%
Depreciation and amortization
8,880
9,552
(672)
(7)
%
27,384
29,361
(1,977)
(7)
%
Goodwill impairment
162,000
—
(162,000)
(100)
%
162,000
—
162,000
(100)
%
Total operating expenses
210,990
47,174
163,816
347
%
304,017
147,418
156,599
106
%
(Loss) income from operations
(132,675)
40,205
(172,880)
(430)
%
(84,659)
183,904
(268,563)
(146)
%
Other loss, net
(682)
(446)
(236)
53
%
(1,662)
(127)
(1,535)
1209
%
Interest income
4,223
3,425
798
23
%
12,685
6,124
6,561
107
%
Foreign currency (loss) gain, net
(106)
207
(313)
(151)
%
(1,073)
273
(1,346)
(493)
%
Interest expense
(8,264)
(13,064)
4,800
37
%
(25,818)
(35,372)
(9,554)
(27)
%
Total other expense, net
(4,829)
(9,878)
5,049
51
%
(15,868)
(29,102)
(13,234)
(45)
%
(Loss) income before income tax expense
(137,504)
30,327
(167,831)
(553)
%
(100,527)
154,802
(255,329)
(165)
%
Income tax expense
3,850
7,229
(3,379)
(47)
%
12,964
36,904
(23,940)
(65)
%
Net (loss) income
$
(141,354)
$
23,098
$
(164,452)
(712)
%
$
(113,491)
$
117,898
$
(231,389)
(196)
%
42
The following table provides details on our operating results by reportable segment for the respective periods (in thousands, except percentages):
Three Months Ended September 30,
Increase/(Decrease)
Nine Months Ended September 30,
Increase/(Decrease)
2024
2023
$
%
2024
2023
$
%
Revenue
Array Legacy Operations
$
160,266
$
244,857
$
(84,591)
(35)
%
$
459,807
$
895,322
$
(435,515)
(49)
%
STI Operations
71,140
105,581
(34,441)
(33)
%
180,768
339,614
(158,846)
(47)
%
Total
$
231,406
$
350,438
$
(119,032)
(34)
%
$
640,575
$
1,234,936
$
(594,361)
(48)
%
Gross Profit
Array Legacy Operations
$
65,726
$
58,233
$
7,493
13
%
$
192,118
$
241,019
$
(48,901)
(20)
%
STI Operations
12,589
29,146
(16,557)
(57)
%
27,240
90,303
(63,063)
(70)
%
Total
$
78,315
$
87,379
$
(9,064)
(10)
%
$
219,358
$
331,322
$
(111,964)
(34)
%
Comparison of the three and nine months ended September 30, 2024 and 2023
Revenue
Consolidated revenue decreased $119.0 million, or 34%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily driven by lower revenue from Array Legacy Operations of 35% and STI Operations of 33%.
Array Legacy Operations revenue decreased by $84.6 million, or 35%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily driven by a decrease of approximately 35% in volume.
Revenue from STI Operations decreased by $34.4 million, or 33% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease was primarily driven by a decrease of approximately 13% in volume, a decrease of approximately 12% in average selling prices and a foreign currency impact of approximately 7%.
Consolidated revenue decreased $594.4 million, or 48%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by lower revenue from Array Legacy Operations of 49% and STI Operations of 47%.
Array Legacy Operations revenue decreased by $435.5 million, or 49%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by a decrease of approximately 46% in volume and a decrease of approximately 5% in average selling prices.
Revenue from STI Operations decreased by $158.8 million, or 47% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily driven by a decrease of approximately 31% in volume, a decrease of approximately 19% in average selling prices and a foreign currency impact of approximately 3%.
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Cost of Revenue and Gross Profit
Consolidated cost of revenue decreased by $110.0 million, or 42%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, in line with lower revenue, combined with lower input costs per watt, resulting from supply chain and engineering cost control initiatives and the realization of 45X benefits associated with torque tubes and structural fasteners.
Consolidated gross profit decreased by $9.1 million, or 10%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross Margin increased to 34% for the three months ended September 30, 2024, as compared to 25% during the same period in the prior year.
Array Legacy Operations gross profit increased by $7.5 million, or 13%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross margin increased to 41% from 24% for the three months ended September 30, 2024 and 2023, respectively. The increase in gross margin was driven by the realization of 45X benefits associated with torque tubes and structural fasteners during the quarter.
STI Operations gross profit decreased by $16.6 million, or 57%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross margin for STI Operations decreased to 18% from 28% for the three months ended September 30, 2024 and 2023, respectively, driven primarily by a decline in average selling prices of approximately 12%, partially offset by lower commodity prices.
Consolidated cost of revenue decreased by $482.4 million, or 53%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, in line with lower revenues and the realization of 45X benefits associated with torque tubes and structural fasteners.
Consolidated gross profit decreased by $112.0 million, or 34%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross margin increased to 34% for the nine months ended September 30, 2024, as compared to 27% during the same period in the prior year.
Array Legacy Operations gross profit decreased by $48.9 million, or 20%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross margin at Array Legacy Operations increased to 42% from 27% for the nine months ended September 30, 2024 and 2023, respectively. The increase in gross margin was driven by the realization of 45X benefits associated with torque tubes and structural fasteners. In addition, the Company also recognized a one-time $4.0 million settlement with one of our vendors during the first quarter of 2024, which was recorded as a reduction of cost of product and service revenue.
STI Operations gross profit decreased by $63.1 million, or 70%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross margin for STI Operations decreased to 15% from 27% for the nine months ended September 30, 2024 and 2023, respectively, in line with lower revenue and a decrease in average selling prices of 19%, partially offset by lower commodity prices.
Operating Expenses
Consolidated general and administrative expenses for the three and nine months ended September 30, 2024 increased by $2.7 million, or 7%, and decreased by $0.9 million, or 1%, respectively, compared to the three and nine months ended September 30, 2023. The increase during the third quarter of 2024 was primarily due to an increase of $2.0 million in legal and other professional fees, an increase of $1.6 million in an allowance
44
for credit risk related to one customer in Brazil, partially offset by lower personnel expenses as a result of lower stock-based compensation expense and lower headcount.
General and administrative expenses decreased during the nine months ended September 30, 2024 due to $4.4 million of lower personnel expenses as a result lower stock-based compensation expense and lower headcount, partially offset by an increase of $3.4 million in an allowance for credit risk related to a limited number of customers in Brazil.
Change in the fair value of contingent consideration for the three and nine months ended September 30, 2024 resulted in a loss of $39 thousand and a gain of $0.3 million, respectively, compared to the three and nine months ended September 30, 2023.
Consolidated depreciation and amortization expense for the three and nine months ended September 30, 2024 decreased by $0.7 million, or 7%, and $2.0 million, or 7%, respectively, compared to the three and nine months ended September 30, 2023. The decrease was primarily due to certain assets acquired becoming fully amortized.
During the three months ended September 30, 2024, the Company identified certain indicators of impairment, which resulted in an impairment of goodwill of $162.0 million. See Note 5 – Goodwill and Other Intangibles for additional information.
Interest Income
Consolidated interest income for the three and nine months ended September 30, 2024 increased by $0.8 million, or 23%, and $6.6 million, or 107%, respectively, compared to the three and nine months ended September 30, 2023, primarily as a result of higher cash on hand and higher yields on our cash management program.
Interest Expense
Consolidated interest expense for the three and nine months ended September 30, 2024 increased by $4.8 million, or 37%, and $9.6 million, or 27%, respectively, compared to the three and nine months ended September 30, 2023, primarily due to the impact of the $74.3 million of principal pay downs on our Term Loan Facility during 2023. These pay downs were the result of focused efforts to decrease our outstanding debt balance with free cash flows from operations.
Income Tax Expense
Consolidated income tax expense for the three and nine months ended September 30, 2024 decreased by $3.4 million, or 47%, and $23.9 million, or 65%, respectively, compared to the three and nine months ended September 30, 2023. The Company recorded income tax expense of $3.9 million and $13.0 million, respectively, for the three and nine months ended September 30, 2024, compared to income tax expense of $7.2 million and $36.9 million, respectively, for the three and nine months ended September 30, 2023.
Our effective tax rate was (2.8)% and (12.9)% for the three and nine months ended September 30, 2024, respectively, and 23.8% for both the three and nine months ended September 30, 2023.
No tax benefit was recorded from the goodwill impairment recorded for the three months ended September 30, 2024 as the goodwill is non-deductible for income tax purposes. Our effective tax rate, excluding the impact of the goodwill impairment was 15.7% and 21.1% for the three and nine months ended September 30, 2024. The tax expense for the three months ended September 30, 2024, was favorably impacted by lower profits in non-
45
US jurisdictions and additional tax credits recorded during the period. This is partially offset by legislative changes in Brazil where a local tax incentive is no longer exempt from federal income tax beginning in 2024. Tax expense for the three months ended September 30, 2023 was unfavorably impacted by higher income reported in non-U.S. jurisdictions.
The Company recorded income tax expense of $13.0 million for the nine months ended September 30, 2024, compared to an expense of $36.9 million for the nine months ended September 30, 2023. Income tax expense for the nine months ended September 30, 2024 was favorably impacted by lower profits in non-US jurisdictions and additional tax credits recorded during the period. This was partially offset by legislative changes in Brazil where a local tax incentive is no longer exempt from federal income tax beginning in 2024. Additionally, tax expense of $0.5 million related to equity-based compensation, was recorded discretely. Tax expense for the nine months ended September 30, 2023 was unfavorably impacted by higher income reported in non-U.S. jurisdictions, offset by a tax benefit of $1.2 million related to equity-based compensation, recorded discretely.
