Array Technologies, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included in Part I, “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q (this “Quarterly Report”), as well as our audited financial statements and notes thereto as of and for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”). Each of the terms the “Company,” “Array,” “we,” or “us” as used herein refers collectively to Array Technologies, Inc. and its wholly owned subsidiaries, unless otherwise stated. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections captioned “Forward-Looking Statements” and “Risk Factors” in this Quarterly Report and our 2022 Annual Report. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, financing and investment plans, dividend policy, competitive position, industry and regulatory environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. You should read this report with the understanding that our actual future results may be materially different from what we expect. Important factors that could cause actual results to differ materially from our expectations include factors in “Summary Risk Factors” and the “Risk Factors” sections of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Summary Risk Factors Our business is subject to a number of risks that if realized could materially and adversely affect our business, financial conditions, results of operations, cash flows and access to liquidity. These risks are discussed more fully in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our principal risks include the following: • if demand for solar energy projects does not continue to grow or grows at a slower rate than we anticipate, our business will suffer; 32 • 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; • competitive pressures within our industry may harm our business, revenues, growth rates and market share; • a loss of one or more of our significant customers, their inability to perform under their contracts, or their default in payment, could harm our business and negatively impact revenue, results of operations and cash flow; • a failure to retain key personnel or a failure to attract additional qualified personnel may affect our ability to achieve our anticipated level of growth and adversely affect our business; • a drop in the price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition, results of operations and prospects; • we have and may continue to face challenges in our ability to consolidate the financial reporting of our acquired foreign subsidiaries; • defects or performance problems in our products could result in loss of customers, reputational damage and decreased revenue, and we may face warranty, indemnity and product liability claims arising from defective products; • we may experience delays, disruptions or quality control problems in our product development operations; • a further 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; • changes to tax laws and regulations that are applied adversely to us or our customers could materially adversely affect our business, financial condition, results of operations and prospects; • existing electric utility industry policies and regulations, and any subsequent changes, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems, which may significantly reduce demand for our products or harm our ability to compete; • the interruption of the flow of materials from international vendors could disrupt our supply chain, including as a result of the imposition of additional duties, tariffs and other charges or restrictions on imports and exports; • changes in the global trade environment, including the imposition of import tariffs or other import restrictions, could adversely affect the amount or timing of our revenues, results of operations or cash flows; • economic, political and market conditions, including the Russian-Ukraine conflict, uncertain credit and global financial markets resulting from increasing inflation and interest rates along with recent bank failures, and the COVID-19 pandemic, have had and could continue to have an adverse effect on our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price; • 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; 33 • 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; • significant changes in the cost of raw materials could adversely affect our financial performance; • we may be unable to remediate our material weaknesses in a timely manner or at all; • our substantial indebtedness could adversely affect our financial condition; • the implementation of the Inflation Reduction Act may not deliver as much growth as we are anticipating, and we may not be able to maximize its benefits; and • cybersecurity or other data incidents, including unauthorized disclosure of personal or sensitive data or theft of confidential information could harm our business. Overview We are one of the world’s largest manufacturers of ground-mounting tracking systems used in solar energy projects at utility scale. Our principal products are a portfolio of integrated solar tracking systems comprised of steel supports, electric motors, gearboxes and electronic controllers commonly referred to as a single-axis “tracker.” Trackers move solar panels throughout the day to maintain an optimal orientation to the sun, which significantly increases their energy production. Solar energy projects that use trackers generate more energy and deliver a lower Levelized Cost of Energy than projects that use “fixed tilt” mounting systems, which do not move. The vast majority of ground mounted solar systems in the U.S. use trackers. Our flagship tracker uses a patented design that allows one motor to drive multiple rows of solar panels through articulated driveline joints. To avoid infringing on our U.S. patent, our competitors must use designs that we believe are inherently less efficient and reliable. For example, our largest competitor’s design requires one motor for each row of solar panels. As a result, we believe our products have greater reliability, lower installation costs, reduced maintenance requirements and competitive manufacturing costs. Our core U.S. patent on a linked-row, rotating gear drive system does not expire until February 5, 2030. With our acquisition of STI in January 2022, we added a dual-row tracker design to our product portfolio. This tracker uses one motor to drive two connected rows and is ideally suited for sites with irregular and highly angled boundaries or fragmented project areas. To offer a comprehensive set of solutions to the growing market, in September 2022, we also introduced a third tracker product requiring significantly less grading and civil works permitting prior to installation in addition to accommodating uneven terrain. This suite of products extends our target applications and ability to deliver the best utility-scale solar tracker solutions to the market. We sell our products to engineering, procurement and construction firms (“EPCs”) that build solar energy projects and to large solar developers, independent power producers and utilities, often under master supply agreements or multi-year procurement contracts. During the nine months ended September 30, 2023, we derived 72% and 28% of our revenues from customers in the United States and the rest of the world, respectively. As of September 30, 2023, we had shipped more than 70.0 gigawatts of trackers to customers worldwide, including STI. Our corporate headquarters are located in Albuquerque, New Mexico. As of September 30, 2023, we had 1,058 full-time employees. 34 Acquisition of STI Norland On January 11, 2022, the Company completed its acquisition of STI for purchase consideration of $410.5 million in cash and 13,894,800 shares of the Company’s common stock. The fair value of the purchase consideration was $610.8 million and resulted in the Company owning 100% of the equity interests in STI. STI generates revenue through the design, manufacture and sale of its utility-scale solar tracker systems to customers in global markets that include Spain, Brazil, U.S. and South Africa. The integration of STI provides us the opportunity to accelerate our international expansion and better address rising global demand for utility-scale solar projects, particularly in developing countries in South America and Africa. Out-of-Period Adjustment for the Correction of Errors During the first quarter of fiscal year 2023, the Company identified certain errors in its previously issued financial statements that have been corrected through a cumulative out-of-period adjustment in the condensed consolidated financial statements as of and for the three months ended March 31, 2023. The Company has concluded that the cumulative out-of-period adjustment for the correction of these errors is not material to the financial statements for the three months ended March 31, 2023. A summary of these corrections and a summary of the cumulative impact is provided in Note 1 – Organization, Business and Out-of-Period Adjustments in Part I of this Quarterly Report. Inflation Inflationary pressures are expected to persist, at least in the near-term, and may continue to negatively impact our results of operation. To mitigate the inflationary pressures on our business, we have implemented selective price increases in certain markets, accelerated productivity initiatives and expanded our supplier base, while continuing to execute on overhead cost containment practices. Impact of Potential Solar Module Supply Chain Disruptions On April 1, 2022, the U.S. Department of Commerce (“USDOC”) initiated anti-circumvention inquiries of the U.S. Solar 1 Orders covering merchandise from Vietnam, Malaysia, Thailand, and Cambodia pursuant to Section 781 of the Tariff Act of 1930. The USDOC issued preliminary determinations in these inquiries on December 1, 2022, affirmatively finding that certain photovoltaic solar cells and modules produced in Vietnam, Malaysia, Thailand, and Cambodia using parts and components from China from certain producers and/or exporters, are circumventing the Solar 1 Orders and therefore should be subject to the antidumping and countervailing duty liabilities arising from those orders. As a result of the USDOC’s investigation, we saw a number of projects in our order book initially delayed; however, on June 6, 2022, President Biden issued an emergency declaration delaying the imposition of any cash deposit or duty payment obligations on merchandise subject to these inquiries until the earlier of (i) the expiration of the order on June 6, 2024, or (ii) termination of the emergency declaration by the President. Merchandise from the four subject countries covered under the scope of these inquiries should therefore not be subject to any antidumping or countervailing duty liabilities under the Solar 1 Orders until the termination of the emergency declaration as long as the importer(s) and exporter(s) follow proper certification procedures that will be implemented by the USDOC. On May 3, 2023, however, the U.S. Senate voted to repeal President Biden’s emergency declaration. On May 16, President Biden announced that he had vetoed the U.S. Senate’s actions, and the emergency declaration will remain in place until June of 2024. On August 18, 2023, the USDOC announced the final determinations in the circumvention inquiries of solar cells and modules from China. The USDOC found that certain Chinese producers were shipping solar products through Cambodia, Malaysia, Thailand, and/or Vietnam for minor processing in an attempt to circumvent 35 antidumping and countervailing duties. The final determination affirms the USDOC’s preliminary findings in most respects; however, pursuant to President Biden’s June 6, 2022 emergency declaration, duties will not be collected on any solar module and cell imports from these four countries until June 2024. The repeal of the President’s emergency declaration, and any affirmative determinations made once the suspension is lifted in any event, would have an adverse effect on the global solar energy marketplace, and as such, an adverse effect on our business, financial condition, and results of operations. While we do not sell solar modules, the degree of our exposure is dependent on, among other things, the impact of the investigation on the projects that are also intended to use our products, with such impact being largely out of our control. To date, we have seen a number of projects in our order book delayed as a result of the USDOC investigation; however, the ultimate severity or duration of the expected solar panel supply chain disruption or its effects on our clients’ solar project development and construction activities remains uncertain. More broadly, legislation has been proposed that would make it easier for domestic companies to obtain affirmative determinations in antidumping and countervailing duties investigations. The proposed USICA/America COMPETES Act, if enacted, could result in future successful petitions that limit imports from Asia and other regions. Solar panel imports to the U.S. may also be impacted by the Uyghur Forced Labor Prevention Act (“UFLPA”) that was signed into law by President Biden on December 23, 2021. According to U.S. Customs and Border Protection, “it establishes a rebuttable presumption that the importation of any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China, or produced by certain entities, is prohibited by Section 307 of the Tariff Act of 1930 and that such goods, wares, articles, and merchandise are not entitled to entry to the U.S. The presumption applies unless the Commissioner of U.S. Customs and Border Protection determines that the importer of record has complied with specified conditions and, by clear and convincing evidence, that the goods, wares, articles, or merchandise were not produced using forced labor.” There continues to be uncertainty in the market around achieving full compliance with UFLPA, whether related to sufficient traceability of materials or other factors. This has created a significant compliance burden and constrained solar panel imports. We cannot currently predict what, if any, impact the UFLPA will have on the overall future supply of solar panels into the U.S. and the related timing and cost of our clients’ solar project, development and construction activities. While we do not import or sell solar panels, project delays caused by solar panel constraints may negatively impact our product delivery schedules and future sales, and therefore our business, financial condition, and results of operations. Antidumping and Countervailing Duty Petitions on Aluminum Extrusions On October 4, 2023, domestic producers filed petitions with the USDOC International Trade Commission, seeking antidumping duties on imports of aluminum extrusions from Colombia, the Dominican Republic, Ecuador, India, Indonesia, Italy, Malaysia, Mexico, China, South Korea, Taiwan, Thailand, Turkey, the United Arab Emirates (UAE) and Vietnam, and countervailing duties on such imports from China, Indonesia, Mexico and Turkey. The merchandise subject to this investigation is aluminum extrusions, regardless of form, finishing or fabrication, whether assembled with other parts or unassembled, whether coated, painted, anodized or thermally improved. Certain components in our trackers, including certain clamps, U-joints, and bearing housings are made using extruded aluminum. It is anticipated that the USDOC will set preliminary countervailing duty rates in March of 2024 and preliminary antidumping rates in May of 2024, with the potential to cover materials imported from December 2023 and February 2024 onward, respectively. We cannot currently predict what, if any, impact the USDOC’s investigation will have on the overall future supply of these components. We continue to monitor developments in the investigation and work to mitigate its impact on our 36 supply chain, but if we are unable to do so, these antidumping and countervailing duties could negatively impact our business, financial condition, and results of operations. Impact of the Ongoing Russian-Ukraine Conflict The ongoing Russian-Ukraine conflict has reduced the availability of material that can be sourced in Europe and, as a result, increased logistics costs for the procurement of certain inputs and materials used in our products. We do not know ultimate severity or duration of the conflict, but we continue to monitor the situation and evaluate our procurement strategy and supply chain as to reduce any negative impact on our business, financial condition and results of operations. Performance Measures In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. The primary operating metric we use to evaluate our sales performance and to track market acceptance of our products from year to year is megawatts (“MWs”) shipped generally and the change in MW shipped from period to period specifically. MWs are measured for each individual project and calculated based on the expected output of that project once installed and fully operational. We also utilize metrics related to price and cost of goods sold per MW, including average selling price (“ASP”) and cost per watt (“CPW”). ASP is calculated by dividing total applicable revenues by total applicable MWs, while CPW is calculated by dividing total applicable costs of goods sold by total applicable MWs. These metrics enable us to evaluate trends in pricing, manufacturing cost and customer profitability. Key Components of Our Results of Operations The following discussion describes certain line items in our consolidated statements of operations. Revenue Our operating segments generate revenue from the sale of solar tracking systems, parts and services. Our customers include EPCs, utilities, large solar developers and independent power producers. For each individual solar project, we enter into a contract with our customers covering the price, specifications, delivery dates and warranty for the products being purchased, among other things. Our contractual delivery period for the tracker system and parts can vary from days to several months. Contracts can range in value from hundreds of thousands to tens of millions of dollars. Our revenue is affected by changes in the volume and ASPs of solar tracking systems purchased by our customers. The quarterly volume and ASP of our systems is driven by the supply of, and demand for, our products, changes in product mix between module type and wattage, geographic mix of our customers, strength of competitors’ product offerings, and availability of government incentives to the end-users of our products. Our revenue growth is dependent on continued growth in the amount of solar energy projects installed each year as well as our ability to increase our share of demand in each of the geographies where we compete, expanding our global footprint to new evolving markets, growing our production and supply chain capabilities to meet demand, and continuing to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers. 37 Cost of Revenue and Gross Profit Cost of revenue for both segments consists primarily of product costs, including purchased components, as well as costs related to shipping, tariffs, customer support, product warranty, personnel and depreciation of test and manufacturing equipment. Personnel costs in cost of revenue includes both direct labor costs as well as costs attributable to any individuals whose activities relate to the transformation of raw materials or component parts into finished goods or the transportation of materials to the customer. Some of these costs, primarily personnel and depreciation of test and manufacturing equipment, are not directly affected by sales volume. 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. In addition, cost of revenue includes amortization of developed technology. 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 General and administrative expenses General and administrative expenses consist 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. Further, as a relatively new public company, we may incur additional audit, accounting, tax, legal and other costs related to compliance with applicable securities laws and other regulations, as well as additional insurance, investor relations and other costs associated with being a public company. Contingent Consideration Contingent consideration consists of the changes in fair value of the Taxes Receivable Agreement (“TRA”) entered into with Ron P. Corio, a former indirect stockholder, concurrent with the Acquisition of Array Technologies Patent Holdings Co., LLC by our Former Parent, ATI Investment Parent, LLC. The TRA liability is recorded at fair value and changes in the fair value are recognized in earnings. The TRA will generally provide for the payment by our operating company, Array Tech, Inc. (f/k/a Array Technologies, Inc.), to Ron P. Corio 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. Estimating fair value of the TRA is by nature imprecise. The significant fair value inputs used to estimate the future expected TRA payments to Mr. Corio include the timing of tax payments, a discount rate, book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA. Depreciation and Amortization 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. 38 Amortization of intangibles consists of customer relationships, contractual backlog, and the STI trade name amortized over their expected period of use. Non-Operating Expenses Interest Expense Interest expense consists of interest and other charges paid in connection with (i) our $575 million senior secured 7-year term loan facility (the “Term Loan Facility”), (ii) our $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”), (iii) our 1.00% Convertible Senior Notes due 2028 (the “Convertible Notes”), and (iv) the Other Debt we assumed in connection with the STI Acquisition. Income Tax Expense We are subject to U.S. federal and state and non-U.S. income taxes. As we expand into additional foreign markets, we may be subject to additional foreign tax. Results of Operations The following table sets forth our consolidated statement of operations (dollars in thousands): Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease) 2023 2022 $ % 2023 2022 $ % Revenue $ 350,438 $ 515,024 $ (164,586) (32) % $ 1,234,936 $ 1,235,475 $ (539) — % Cost of revenue: Cost of product and service revenue 259,419 434,801 (175,382) (40) % 892,696 1,088,719 (196,023) (18) % Amortization of developed technology 3,640 3,640 — — % 10,918 10,918 — — % Total cost of revenue 263,059 438,441 (175,382) (40) % 903,614 1,099,637 (196,023) (18) % Gross profit 87,379 76,583 10,796 14 % 331,322 135,838 195,484 144 % Operating expenses: General and administrative 37,432 38,703 (1,271) (3) % 115,825 113,064 2,761 2 % Change in fair value of contingent consideration 190 (572) 762 133 % 2,232 (5,981) 8,213 137 % Depreciation and amortization 9,552 21,258 (11,706) (55) % 29,361 63,237 (33,876) (54) % Total operating expenses 47,174 59,389 (12,215) (21) % 147,418 170,320 (22,902) (13) % 39 Income (loss) from operations 40,205 17,194 23,011 134 % 183,904 (34,482) 218,386 633 % Other (expense) income: Other (expense), net (446) (1,092) 646 59 % (127) (2,295) 2,168 (94) % Interest income 3,425 778 2,647 (340) % 6,124 2,371 3,753 158 % Legal settlement — 42,750 (42,750) (100) % — 42,750 (42,750) (100) % Foreign currency gain (loss) 207 (159) 366 230 % 273 1,968 (1,695) (86) % Change in fair value of derivative assets 116 — 116 100 % (1,140) — (1,140) (100) % Interest expense (13,064) (8,831) (4,233) (48) % (35,372) (23,812) (11,560) (49) % Total other (expense) income (9,762) 33,446 (43,208) (129) % (30,242) 20,982 (51,224) (244) % Income (loss) before taxes 30,443 50,640 (20,197) (40) % 153,662 (13,500) 167,162 1238 % Income tax expense (benefit) 7,229 9,996 (2,767) (28) % 39,508 (23,183) 62,691 270 % Net income $ 23,214 $ 40,644 $ (17,430) (43) % $ 114,154 $ 9,683 $ 104,471 1079 % The following table provides details on our operating results by reportable segment for the respective periods (dollars in thousands): Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease) Revenue: 2023 2022 $ % 2023 2022 $ % Array Legacy Operations $ 244,857 $ 400,463 $ (155,606) (39) % $ 895,322 $ 998,292 $ (102,970) (10) % STI Operations 105,581 114,561 (8,980) (8) % 339,614 237,183 102,431 43 % Total Revenue $ 350,438 $ 515,024 $ (164,586) (32) % $ 1,234,936 $ 1,235,475 $ (539) — % Gross Profit Array Legacy Operations $ 58,233 $ 60,281 $ (2,048) (3) % $ 241,019 $ 108,111 $ 132,908 123 % STI Operations 29,146 16,302 12,844 79 % 90,303 27,727 62,576 226 % Total Gross Profit $ 87,379 $ 76,583 $ 10,796 14 % $ 331,322 $ 135,838 $ 195,484 144 % Comparison of the three months ended September 30, 2023 and 2022 Revenue Consolidated revenue decreased $164.6 million, or 32%, driven primarily by a decrease in both Array Legacy Operations of 39% and STI Operations of 8%. 40 The decrease in revenue in Array Legacy Operations was driven by a 33% reduction in the number of MWs shipped due to project delays from our customers, as well as a 9% reduction in ASP due to lower input costs for materials and logistics. The decrease in revenue in STI Operations was driven by a decrease in the number of megawatts shipped, most notably in the Brazil region, which offset lower ASP due to a smaller percentage of construction services being offered. Cost of Revenue and Gross Profit Consolidated cost of revenue decreased by $175.4 million, or 40%, driven primarily by a reduction in revenue combined with lower input costs. Consolidated gross profit increased by $10.8 million, or 14%. As a percentage of revenue, consolidated gross profit increased to 25% for the three months ended September 30, 2023, as compared to 15% during the same period in the prior year. Both operating segments had increases in gross profit as a percent of revenue. Array Legacy Operations gross profit decreased by $2.0 million, or 3%. As a percentage of revenue, gross profit increased to 24% from 15% for the three months ended September 30, 2023 and 2022, respectively. The increase in gross profit as a percent of revenue was driven by an improvement in pass through pricing to customers, in addition to cost savings due to improved raw materials pricing and lower logistics rates, as well as a higher proportion of higher margin non-tracker revenue. STI Operations gross profit increased by $12.8 million, or 79%. As a percentage of revenue, gross profit for STI Operations increased to 28% from 14% for the three months ended September 30, 2023 and 2022, respectively, driven primarily by improved pass through pricing, cost savings opportunities on raw materials and a reduced impact of lower margin construction related services provided. Operating Expenses: General and Administrative Consolidated general and administrative expenses decreased by $1.3 million, or 3%. In the third quarter of 2022, the Company incurred $4.9 million in professional fees related to the STI acquisition for which there were no comparable expenses in the current year. Excluding those fees, expense was up primarily due to an increase in payroll and related costs, driven by an increase in headcount. Contingent Consideration Consolidated contingent consideration expense increased by $0.8 million, or 133%, as a result of the increased valuation of the TRA liability. Depreciation and Amortization Consolidated depreciation and amortization decreased by $11.7 million or 55%, due to the decrease in the amortization of intangibles of $12.0 million, as the backlog purchased as part of the STI Acquisition had a one-year life and was fully amortized in the first quarter of 2023. Interest Expense Consolidated interest expense increased by $4.2 million, or 48%, primarily due to increased variable interest rates charged on our Term Loan Facility as well as the acceleration of $2.5 million of non-cash interest expense related to an unscheduled principal payment made against the outstanding Term Loan balance. 41 We expect interest expense to be higher for the remainder of 2023 compared to 2022 as a result of continued higher variable interest rates. Income Tax Expense (Benefit) Consolidated income tax decreased by $2.8 million, or 28%. The Company recorded income tax expense of $7.2 million for the three months ended September 30, 2023, compared to income tax expense of $10.0 million for the three months ended September 30, 2022. Our effective tax rate was 23.7% for the three months ended September 30, 2023, and 19.7% for the three months ended September 30, 2022. The tax expense for the three months ended September 30, 2023, was unfavorably impacted by higher income in non-U.S. jurisdictions which have higher tax rates than the U.S. and non-deductible expenses. The tax expense for the three months ended September 30, 2022, which includes $8.7 million related to the legal settlement discretely recorded in the period, was favorably impacted by losses in non-U.S. jurisdictions which have higher tax rates than the U.S., partially offset by non-deductible expenses. Net Income Consolidated net income decreased by $17.4 million, or 43%, driven by a $164.6 million decrease in consolidated revenue and the nonrecurrence in the current year of a $42.8 million legal settlement gain recognized by Array Legacy Operations during the three months ended September 30, 2022. Comparison of the nine months ended September 30, 2023 and 2022 Revenue Consolidated revenue was flat year over year, driven by an increase in STI Operations of $102.4 million, offset by a decrease in Array Legacy Operations of $103.0 million. The $102.4 million, or 43%, revenue increase in STI Operations was driven by an increase in the number of megawatts shipped, most notably in the Brazil region, which offset lower ASP due to a smaller percentage of construction services being offered. The $103.0 million, or 10%, revenue decrease in Array Legacy Operations was driven by a decrease in the number of megawatts shipped, due primarily to project delays from our customers. Cost of Revenue and Gross Profit Consolidated cost of revenue decreased by $196.0 million, or 18%, driven primarily by a reduction in revenue combined with a decrease in input costs. Consolidated gross profit increased by $195.5 million, or 144%. As a percentage of revenue, consolidated gross profit increased to 27% for the nine months ended September 30, 2023, as compared to 11% during the same period in the prior year. The increase in gross profit dollars was driven by cost savings opportunities and lower overall costs in logistics and raw materials, a higher proportion of higher margin non-tracker revenue and a decrease in lower margin construction related services. Array Legacy Operations gross profit increased by $132.9 million, or 123%. As a percentage of revenue, gross profit at Array Legacy Operations increased to 27% from 11% for the nine months ended September 30, 2023 and 2022, respectively. The increase in gross profit as a percent of revenue was driven by an improvement in pass through pricing to customers, in addition to cost savings opportunities in logistics and raw materials, as well as a higher proportion of higher margin non-tracker revenue. 42 STI Operations gross profit increased by $62.6 million, or 226%. As a percentage of revenue, gross profit for STI Operations increased to 27% from 12% for the nine months ended September 30, 2023 and 2022, respectively, driven primarily by improved pass through pricing and a reduced impact of lower margin construction related services provided. Operating Expenses: General and Administrative Consolidated general and administrative expenses increased by $2.8 million, or 2%. The increase was driven by higher payroll and related expenses incurred to increase headcount in support of our growth and innovation strategy. These increases were partially offset by no acquisition related expenses in 2023 compared to expenses related to the STI Acquisition in 2022. Contingent Consideration Consolidated contingent consideration expense increased by $8.2 million, or 137% as a result of the increased valuation of the TRA liability, which was driven by a decrease in the credit spread used in the valuation, consistent with the overall downward trend of credit spreads subsequent to 2022. Depreciation and Amortization Consolidated depreciation and amortization decreased by $33.9 million, or 54%, due to the decrease in the amortization of intangibles of $34.7 million, as the backlog purchased as part of the STI Acquisition had a one-year life and was fully amortized as of the first quarter of 2023. Interest Expense Consolidated interest expense increased by $11.6 million, or 49%, primarily due to increased variable interest rates charged on our Term Loan Facility as well as the acceleration of $3.6 million of non-cash interest expense related to unscheduled principal payments made against the outstanding Term Loan balance. Income Tax Expense (Benefit) Consolidated income tax increased by $62.7 million, or 270%. The Company recorded income tax expense of $39.5 million for the nine months ended September 30, 2023, compared to a benefit of $23.2 million for the nine months ended September 30, 2022. Our effective tax rate was 25.7% and 171.7% for the nine months ended September 30, 2023 and 2022, respectively. The tax expense for the nine months ended September 30, 2023, was unfavorably impacted by higher income in non-U.S. jurisdictions and an increase in income tax expense related to the Put Option, partially offset by benefits related to excess stock compensation deductions recorded discretely during the period. The tax benefit for the nine months ended September 30, 2022, which includes $8.7 million related to the legal settlement discretely recorded in the period, was favorably impacted by losses in non-U.S. jurisdictions which have higher tax rates than the U.S., partially offset by non-deductible expenses. Net Income Consolidated net income increased by $104.5 million, or 1,079%, driven by a 144% increase in consolidated gross profit margin and a $22.9 million reduction in operating expenses, partially offset by a $62.7 million increase in income tax expense and the nonrecurrence in the current year of a $42.8 million legal settlement gain recognized by Array Legacy Operations during the three months ended September 30, 2022. 43 Liquidity and Capital Resources Cash Flows (in thousands) Nine Months Ended September 30, 2023 2022 Net cash provided by operating activities $ 137,974 $ 44,023 Net cash used in investing activities (11,615) (380,506) Net cash (used in) provided by financing activities (84,442) 33,146 Effect of exchange rate changes on cash and cash equivalents (1,808) (1,555) Net change in cash and cash equivalents $ 40,109 $ (304,892) We have historically financed our operations primarily with the proceeds from 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 will be sufficient to meet our future cash needs. As of September 30, 2023, our cash balance was $174.0 million, of which $62.5 million was held outside the U.S., and net working capital was $462.6 million. We had outstanding borrowings of $239.3 million under our $575 million Term Loan Facility and $175.1 million available to us under our $200 million Revolving Credit Facility. The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows in the future and available borrowing capacity under its Senior Secured Credit Facility will be sufficient to meet its future liquidity needs. Operating Activities For the nine months ended September 30, 2023, cash provided by operating activities was $138.0 million, of which $184.8 million was generated from net income as adjusted for the impact of non-cash expenses, consisting primarily of depreciation and amortization, equity-based compensation, amortization of developed technology, and amortization of debt discount and issuance costs. Increases in accrued expenses and other of $18.5 million, accounts payable of $14.4 million, and inventory of $12.6 million, were partially offset by decreases in deferred revenue of $78.2 million and accounts receivable of $6.4 million. For the nine months ended September 30, 2022, cash provided by operating activities was $44.0 million, primarily due to an increase in net income and the Company being awarded and paid a settlement from Nextracker LLC, for $42.8 million for the Nextracker Litigation. In addition, accounts payable and accruals increased cash by $42.2 million and $41.3 million, respectively, driven by higher expenses associated with higher sales, offset by a use from accounts receivable of $139.0 million driven primarily by higher sales. Investing Activities For the nine months ended September 30, 2023, net cash used in investing activities was $11.6 million, all of which was related to the purchase of property, plant and equipment. For the nine months ended September 30, 2022, net cash used in investing activities was $380.5 million, primarily due to cash used in the STI Acquisition. 44 Financing Activities For the nine months ended September 30, 2023, net cash provided by financing activities was $84.4 million, driven primarily by $73.2 million in payments on our Term Loan and a $8.5 million net reduction of other debt. For the nine months ended September 30, 2022, net cash provided by financing activities was $33.1 million, of which $48.4 million related to proceeds from the Additional Closing in January 2022 offset by a dividend payment of $18.4 million on the Series A preferred stock. Series A Redeemable Perpetual Preferred Stock On August 10, 2021, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investors (the “Purchasers”). Pursuant to the Securities Purchase Agreement, on August 11, 2021, we issued and sold to the Purchaser 350,000 shares of a newly designated Series A Redeemable Perpetual Preferred Stock, par value $0.001 per share (the “Series A Shares”), having the powers, designations, preferences, and other rights set forth in the Certificate of Designations, and 7,098,765 shares of our common stock, par value $0.001 per share, for an aggregate purchase price of $346.0 million. Further, pursuant to the Securities Purchase Agreement, and subject to the terms and conditions set forth therein, as amended, we have issued and sold to the Purchasers 776,235 shares of common stock for an aggregate purchase price of $776. In January 2022, we issued 50,000 of Series A Shares, and 1,125,000 shares of our common stock in the Additional Closing for an aggregate purchase price of $49.4 million. For more information related to the Series A Shares, see Note 8 – Redeemable Perpetual Preferred Stock ,” to the accompanying condensed consolidated financial statements. Debt Obligations For a discussion of our debt obligations see Note 7 – Debt to our condensed consolidated financial statements included in this Quarterly Report. Surety Bonds We are required to provide surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee our performance in accordance with contractual or legal obligations. As of September 30, 2023, we posted surety bonds in the total amount of approximately $217.6 million. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. Critical Accounting Policies and Significant Management Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the (“U.S. GAAP”). In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates. To the extent that there are material differences between 45 these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We consider an accounting policy to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the condensed consolidated financial statements. Fair Value of Financial Instruments The capped call option agreements associated with conversion of the Convertible Notes (the “Capped Calls”) are accounted for as an asset that is recorded at fair value within Derivative assets in the consolidated balance sheets. The changes in fair value to Derivative assets are recorded within change in fair value of derivative assets in the Condensed Consolidated Statements of Operations. See Note 1 – Organization, Business and Out of Period Adjustments , and Note 2 – Summary of Significant Accounting Policies , of the condensed consolidated financial statements for further information regarding the accounting of these instruments. The Capped Calls are valued using a Black-Scholes model, with the most judgmental non-observable input being the volatility measure. Changes in the assumptions around the volatility can cause significant changes in the estimated fair value of the Capped Call. Adoption of New and Recently Issued Accounting Pronouncements Refer to Note 2 – Summary of Significant Accounting Policies to our condensed consolidated financial statements for a discussion of adoption of new and recently issued accounting pronouncements.