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, 2023, 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, 2023 (“2023 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 2023 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. 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 typically generate more energy and deliver a lower Levelized Cost of Energy (“LCOE”) 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. 34 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 is on a linked-row, single-driving apparatus that rotates a plurality of tracker rows connected by an articulating drive shaft. This patent does not expire until February 5, 2030. With our acquisition of STI in January of 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 of 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 six months ended June 30, 2024, we derived 72% and 28% of our revenues from customers in the U.S. and the rest of the world, respectively. As of June 30, 2024, we had shipped more than 77.4 gigawatts of trackers to customers worldwide. Our corporate headquarters are located in Albuquerque, New Mexico. As of June 30, 2024, we had 1,013 full-time employees. Research and Development The Company incurs research and development (“R&D”) costs during its process of researching and developing new products and significant enhancements to existing products. R&D costs are a subset of our total engineering spend and consist primarily of personnel-related costs associated with our team of internal engineers, third-party consultants, materials and overhead. The Company expenses these costs as incurred prior to a respective product being ready for commercial production. Total engineering expense was $4.1 million and $4.3 million during the three months ended June 30, 2024 and 2023, respectively, of which $1.8 million and $2.3 million were related to R&D activities performed by the Company during the same period, respectively. Total engineering expense was $8.3 million and $8.2 million during the six months ended June 30, 2024 and 2023, respectively, of which $3.7 million and $4.4 million were related to R&D activities performed by the Company during the same period, respectively. Acquisition of STI Norland On January 11, 2022, we completed our acquisition of STI, which resulted in the Company owning 100% of the equity interests in STI. Similar to Array Legacy operations, 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, the U.S. and South Africa. The integration of STI has allowed us to accelerate our international expansion and better address rising global demand for utility-scale solar projects, particularly in developing countries in Latin America and Africa. 35 Reversal of Out-of-Period Adjustment Recorded During 2023 Interim Periods Capped Calls and Put Option During the three months ended December 31, 2023, the Company consulted with the staff of the Office of the Chief Accountant of the SEC, and after consultation with the staff, the Company concluded that the change from its historical accounting treatment for its Capped Calls and its Put Option that were made during the three months ended March 31, 2023, was not required. As a result, the Company has chosen to revert to its historical accounting and reverse the initial cumulative catch-up recorded during the three months ended March 31, 2023. as well as any subsequent fair value adjusting entries recorded during the interim periods in 2023. See Note 2 – Summary of Significant Accounting Policies . Factors Affecting Results of Operations Project Timing Because we recognize revenue on projects as legal title to equipment is transferred from us to the customer, any delays in large projects from one quarter to another for any reason may cause our results of operations for a particular period to fall below expectations and make the timing of revenue difficult to forecast. Our end-users’ ability to install solar energy systems has been affected by a number of factors including: • Weather . Inclement weather can affect our customers’ ability to install their systems, particularly in the northeastern United States and in Europe. In addition, weather delays can adversely affect our logistics and operations by causing delays in the shipping and delivery of our materials. • The interest rate environment . As interest rates have risen, we have seen customers looking to renegotiate power purchase agreements to improve project returns. Any unexpected or protracted negotiation can cause installation delays and delay our ability to recognize revenue relating to the relevant projects. In addition, we have had customers delay planned installations in anticipation of interest reductions and more favorable project financing conditions later in 2024. • Uncertainty regarding potential tariffs. On April 24, 2024, the American Alliance for Solar Manufacturing Trade Committee, an ad hoc coalition of domestic producers of CSPV cells and modules, filed a petition with the USDOC and the U.S. International Trade Commission (the “USITC”) seeking the imposition of AD/CVD tariffs on imports of CSPV cells and modules from Cambodia, Malaysia, Thailand and Vietnam. The USITC made a preliminary affirmative determination on June 7, 2024, and the USDOC is expected to make its preliminary determination in November of 2024. As a result of these preliminary and expected preliminary determinations, we have had customers determine to pre-emptively change panel selection or plan on project delays in consideration of a potential panel selection change. Once the impact of any potential tariffs is clear, customers can better understand their impact on panel costs and can make relevant timing decisions for specific projects. • Availability of necessary equipment . We have a broad portfolio of customer relationships including presence with every Tier 1 utility in the United States. Each utility has unique specifications for access to its grid, which is generally not consistent across the industry. As the supply of renewables projects has increased, severe shortages and long lead-times in the supply of switches, transformers and HV breakers used in the interconnection of utility scale solar power plants to the grid, has affected the timing and completion of these projects, including for some of our customers. • Macroeconomic factors. There has been a rapid depreciation of the Brazilian Real in conjunction with existing pricing pressures on energy in the Brazilian market. Due to these dynamics, the economic cases for the power purchase agreements, or PPAs, for many solar projects have become less 36 attractive for our customers. Many of the developers of these projects are now signaling delays as they renegotiate the pricing of these PPAs. • Local permitting . If our customers cannot receive permitting for their projects, they are unable to begin and ultimately complete them in a timely manner. A dramatic increase in solar and battery storage sites has increased the average permitting time in many geographies in which our customers operate. Impact of IRA While solar power is cost-competitive with conventional forms of generation in many U.S. states even without the ITC, we believe step-downs in the ITC have influenced the timing and quantity of some customers’ orders. With the passage of the Inflation Reduction Act (“IRA”) in August 2022, the ITC was raised to 30% with no step downs before 2032. Accordingly, we do not anticipate the ITC rate to impact our seasonality during that timeframe. 45X Credit After a period of uncertainty, in December the IRS published proposed regulations on 45X manufacturing credit benefits that largely confirmed our previous understanding around the eligibility of our torque tube. Beginning in late 2023 and continuing into 2024, we have and continue to successfully negotiate agreements with key suppliers around 45X manufacturing credit benefits associated with the torque tube. During the six months ended June 30, 2024, we entered into vendor rebate agreements pertaining to additional parts we concluded qualify as structural fasteners in accordance with the IRC 45X Advanced Manufacturing Production Credit. We are pursuing initiatives to obtain further clarity regarding the eligibility of additional parts that qualify for the 45X Manufacturing Credit in conjunction with negotiating the split of the 45X benefits with suppliers for parts we do not manufacture internally. Domestic Content Safe Harbor Guidance The IRS issued Notice 2023-38 in May of 2023 setting forth guidance on the domestic content bonus tax credits under the IRA. Uncertainties still exist under this guidance, like whose costs would be used (the manufacturer’s cost, a vendor’s cost to acquire, etc.) and how to define manufactured product components associated with trackers. In May of 2024, the IRS issued Notice 2024-41 setting forth further guidance on the domestic content bonus tax credits, including a safe harbor method for calculating domestic content percentages. Notice 2024-41 and the elective safe harbor described therein has clarified some pre-existing uncertainty in the industry from Notice 2023-38, , but it has also introduced uncertainty of its own regarding issues such as what qualifies as a “fastener.” These uncertainties have and could continue to cause our customers to delay projects as they navigate the existing guidance in qualifying for the tax credit and possibly wait for further clarity. Structured Cost Management We actively manage the risk from certain types of customer contracts, including, for example, multi-year contracts that require fixed pricing or pricing tied to certain commodity indices. Depending on the totality of the circumstances and our ability to mitigate risk, we may or may not pursue such contractual arrangements. Where we decline, this may have the effect of driving certain customers or projects to our competitors. We believe this is the right way to manage a high-quality portfolio and drive consistent margins over time. Impact of Attacks on Shipping in the Red Sea The disruption of container shipping traffic through the Red Sea has created port congestion, especially in Asia, affecting transit times, capacity, and shipping costs for routes connecting the rest of the world with Asia. To 37 address the challenges arising from prolonged transit times, we have increased our local sourcing efforts where feasible within certain regions. These measures aim to reduce delays to get the product to project sites on time. There is still uncertainty on how long these disruptions and the severity of their impact on our operations will last, but we continue to monitor the situation and evaluate our procurement and supply chain strategies, as to reduce any negative impact on our business, financial condition, and results of operations. Inflation Inflationary pressures persist and may continue to negatively impact our results of operations. To mitigate the inflationary pressures on our business, despite our ASPs decreasing due to the current deflationary environment for commodities like steel, we have continued to accelerate our productivity initiatives, expanded our supplier base, and continued to execute on our overhead cost containment practices. Impact of AD/CVD Petitions and Determinations The United States currently imposes antidumping and countervailing duties (“AD/CVD”) on certain imported crystalline silicon PV(“CSPV”) cells and modules from China and Taiwan. Such AD/CVD can change over time pursuant to annual reviews conducted by the U.S. Department of Commerce (“USDOC”). In August 2023, the USDOC issued final affirmative circumvention rulings, finding that solar panels completed in Cambodia, Malaysia, Thailand, and Vietnam using parts and components produced in China circumvent the pre-existing AD/CVD orders on China. While we do not sell solar modules, the degree of our exposure is dependent on, among other things, the impact of the AD/CVD orders on the projects that are also intended to use our products, with such impact being largely out of our control. We have seen a number of projects in our order book delayed as a result of the USDOC investigation, and effective enforcement of the AD/CVD orders could negatively impact our results of operations. More broadly, legislation has been proposed that would make it easier for domestic companies to obtain affirmative determinations in antidumping and countervailing duty investigations. The proposed USICA/America COMPETES Act, if enacted, could result in future successful petitions that limit imports from Asia and other regions. Additionally, in October 2023, a coalition of U.S. aluminum extruders and a labor union filed AD/CVD cases on aluminum extrusions from fifteen countries. The USDOC has initiated investigations based on the petitions. Certain components in our trackers, including certain clamps, U-joints, and bearing housings are made using extruded aluminum. Our operating results could be adversely impacted if the USDOC imposes duties on such imports. We continue to monitor developments in the above petition and investigation processes and work to mitigate their impact on our supply chain, but if we are unable to do so, the imposition of AD/CVD orders could negatively impact our business, financial condition, and results of operations. The possibility of additional tariffs and duties in the future like those described above has created uncertainty in the industry. If the price of solar systems in the U.S. increases, the use of solar systems could become less economically feasible and could reduce our gross margins or reduce the demand of solar systems manufactured and sold, which in turn may decrease demand for our products. Additionally, existing or future tariffs may negatively affect key customers, suppliers, and manufacturing partners. Such outcomes could adversely affect the amount or timing of our revenues, results of operations or cash flows, and continuing uncertainty could cause sales volatility, price fluctuations or supply shortages or cause our customers to advance or delay their purchase of our products. It is difficult to predict what further trade-related actions governments may take, which may include additional or increased tariffs and trade restrictions, and we may be unable to quickly and effectively react to such actions. 38 Foreign Currency Translation For non-U.S. subsidiaries that operate in a local currency environment, assets and liabilities are translated into U.S. dollars at period-end exchange rates. Income, expense, and cash flow items are translated at average exchange rates prevailing during the period. For non-U.S. subsidiaries that operate in a U.S. dollar functional currency, local currency inventories and property, plant and equipment are translated into U.S. dollars at rates prevailing when acquired, and all other assets and liabilities are translated at period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the period. Gains and losses which result from remeasurement are included in earnings. 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 is megawatts (“MWs”) shipped and specifically the change in MW shipped from period to period. MWs are measured for each individual project and are calculated based on the respective project’s expected megawatt output once installed and fully operational. We also utilize metrics related to price and cost of goods sold per MW, including average selling price (“ASP”) and cost per watt (“CPW”). ASP is calculated by dividing total applicable revenues by total applicable MWs, whereas CPW is calculated by dividing total applicable costs of goods sold by total applicable MWs. These metrics enable us to evaluate trends in pricing, manufacturing cost, and customer profitability. Key Components of Our Results of Operations The following discussion describes certain line items in our consolidated statements of operations. Revenue We generate revenue from the sale of solar tracking systems, 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, 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 to develop and introduce new innovative products that integrate emerging technologies and the performance requirements of our customers. 39 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 revenues 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. Inflation Reduction Act 45X Credits During the three months ended June 30, 2024, the Company concluded that certain parts manufactured by the Company qualify for the 45X Advanced Manufacturing Production Credits. As a result, the Company recorded it an immaterial cumulative catch-up for 45X Advanced Manufacturing Production Credits related to torque tubes manufactured by the Company and sold from January 1, 2023 through March 31, 2024. 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 first quarter of 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 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 40 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 (dollars in thousands): Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease) 2024 2023 $ % 2024 2023 $ % Revenue $ 255,766 $ 507,725 $ (251,959) (50) % $ 409,169 $ 884,498 $ (475,329) (54) % Cost of revenue Cost of product and service revenue 166,173 357,683 (191,510) (54) % 260,847 633,277 (372,430) (59) % Amortization of developed technology 3,640 3,640 — — % 7,279 7,279 — — % Total cost of revenue 169,813 361,323 (191,510) (53) % 268,126 640,556 (372,430) (58) % Gross profit 85,953 146,402 (60,449) (41) % 141,043 243,942 (102,899) (42) % Operating expenses General and administrative 36,971 40,250 (3,279) (8) % 74,755 78,392 (3,637) (5) % Change in fair value of contingent consideration 503 705 202 29 % (232) 2,043 2,275 111 % Depreciation and amortization 8,877 9,206 (329) (4) % 18,504 19,808 (1,304) (7) % Total operating expenses 46,351 50,161 (3,810) (8) % 93,027 100,243 (7,216) (7) % Income from operations 39,602 96,241 (56,639) (59) % 48,016 143,699 (95,683) (67) % Other (loss) income, net (1,794) 125 (1,919) (1535) % (980) 319 (1,299) (407) % Interest income 4,782 1,468 3,314 226 % 8,462 2,699 5,763 214 % Foreign currency (loss) gain, net (468) 260 (728) (280) % (967) 66 (1,033) (1565) % Interest expense (8,614) (11,577) (2,963) (26) % (17,554) (22,308) (4,754) (21) % Total other expense, net (6,094) (9,724) (2,296) (24) % (11,039) (19,224) (8,185) (43) % Income before income tax expense 33,508 86,517 (58,935) (68) % 36,977 124,475 (87,498) (70) % Income tax expense 7,810 21,352 (13,542) (63) % 9,114 29,675 (20,561) (69) % Net income $ 25,698 $ 65,165 $ (45,393) (70) % $ 27,863 $ 94,800 $ (66,937) (71) % 42 The following table provides details on our operating results by reportable segment for the respective periods (dollars in thousands): Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease) 2024 2023 $ % 2024 2023 $ % Revenue Array Legacy Operations $ 185,160 $ 345,261 $ (160,101) (46) % $ 299,541 $ 650,465 $ (350,924) (54) % STI Operations 70,606 162,464 (91,858) (57) % 109,628 234,033 (124,405) (53) % Total $ 255,766 $ 507,725 $ (251,959) (50) % $ 409,169 $ 884,498 $ (475,329) (54) % Gross Profit Array Legacy Operations $ 77,306 $ 102,950 $ (25,644) (25) % $ 126,392 $ 182,785 $ (56,393) (31) % STI Operations 8,647 43,452 (34,805) (80) % 14,651 61,157 (46,506) (76) % Total $ 85,953 $ 146,402 $ (60,449) (41) % $ 141,043 $ 243,942 $ (102,899) (42) % Comparison of the three months ended June 30, 2024 and 2023 Revenue Consolidated revenue decreased $252.0 million, or 50%, driven by a decrease in Array Legacy Operations of 46% and STI Operations of 57%. The $160.1 million, or 46%, 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 and an ASP decrease on lower input costs per watt. The $91.9 million, or 57%, revenue decrease in STI Operations was driven by a decrease in the number of megawatts shipped, largely due to a year-over-year shift from larger utility-scale projects to smaller distributed generation projects and an ASP decrease due to a smaller percentage of projects with construction services. Cost of Revenue and Gross Profit Consolidated cost of revenue decreased by $191.5 million, or 53%, driven primarily by a reduction in revenue combined with lower input costs per watt resulting from commodities coupled with supply chain and engineering cost out initiatives and the realization of 45X benefits associated with torque tubes and structural fasteners. Consolidated gross profit decreased by $60.4 million, or 41%. As a percentage of revenue, consolidated gross profit increased to 34% for the three months ended June 30, 2024, as compared to 29% during the same period in the prior year. Array Legacy Operations gross profit decreased by $25.6 million, or 25%. As a percentage of revenue, gross profit increased to 42% from 30% for the three months ended June 30, 2024 and 2023, respectively. The increase in gross profit as a percent of revenue was driven by continued performance of our core gross margins, enhanced by the realization of 45X benefits associated with torque tubes and structural fasteners. 43 STI Operations gross profit decreased by $34.8 million, or 80%. As a percentage of revenue, gross profit for STI Operations decreased to 12% from 27% for the three months ended June 30, 2024 and 2023, respectively, driven primarily by higher costs of locally sourced material to support on-time delivery for customers. Operating Expenses Consolidated general and administrative expenses decreased by $3.3 million, or 8%. The decrease was primarily due to a change in estimate related to performance-based equity compensation and lower professional and consulting fees as a result of our initiative to reduce fees and internalize activities that were historically outsourced, more than offsetting incremental recruiting costs, and incremental severance costs Change in the fair value of contingent consideration resulted in a loss of $0.5 million. Consolidated depreciation and amortization decreased by $0.3 million or 4%, effectively flat when compared to the same period in the prior year. Interest Income Consolidated interest income increased by $3.3 million, or 226%, due to higher cash on hand during the second quarter of 2024, coupled with higher interest rates. Interest Expense Consolidated interest expense decreased by $3.0 million, or 26%, primarily due to impact of the $74.3 million of principal pay downs on our Term Loan 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 decreased by $13.5 million, or 63%. The Company recorded income tax expense of $7.8 million for the three months ended June 30, 2024, compared to income tax expense of $21.4 million for the three months ended June 30, 2023. Our effective tax rate was 23.3% for the three months ended June 30, 2024, and 24.7% for the three months ended June 30, 2023. The tax expense for the three months ended June 30, 2024, was impacted by legislation in Brazil which resulted in a local tax incentive no longer being exempt from federal income tax beginning in 2024. Additionally, tax expense of $0.1 million was recorded discretely related to equity-based compensation. The tax expense for the three months ended June 30, 2023, was unfavorably impacted by higher income reported in non-U.S. jurisdictions, partially offset by benefits related to excess stock compensation deductions of $0.8 million recorded discretely during the quarter. Comparison of the six months ended June 30, 2024 and 2023 Revenue Consolidated revenue decreased, $475.3 million, or 54%, driven by a decrease at Array Legacy Operations of $350.9 million and a decrease at STI Operations of $124.4 million. The $350.9 million, or 54%, revenue decrease at Array Legacy Operations was driven by a decrease in the number of megawatts shipped and an ASP decrease due to lower input costs per watt. The $124.4 million, or 53%, revenue decrease at STI Operations was driven by a decrease in the number of megawatts shipped, largely due to a year-over-year shift from larger utility-scale projects to smaller distributed generation projects and an ASP decrease due to a smaller percentage of projects with construction services. 44 Cost of Revenue and Gross Profit Consolidated cost of revenue decreased by $372.4 million, or 58%, driven primarily by a reduction in revenue combined with lower input costs per watt resulting from commodities coupled with supply chain and engineering cost out initiatives and the realization of 45X benefits associated with torque tubes and structural fasteners. Consolidated gross profit decreased by $102.9 million, or 42%. As a percentage of revenue, consolidated gross profit increased to 34% for the six months ended June 30, 2024, as compared to 28% during the same period in the prior year. Array Legacy Operations gross profit decreased by $56.4 million, or 31%. As a percentage of revenue, gross profit at Array Legacy Operations increased to 42% from 28% for the six months ended June 30, 2024 and 2023, respectively. The increase in gross profit as a percent of revenue was primarily driven by the realization of 45X benefits associated with torque tubes and structural fasteners. The Company also recognized a one-time $4.0 million settlement with one of our vendors during the first quarter as a reduction of Cost of revenue. STI Operations gross profit decreased by $46.5 million, or 76%. As a percentage of revenue, gross profit for STI Operations decreased to 13% from 26% for the six months ended June 30, 2024 and 2023, respectively, driven primarily by higher costs of locally sourced material to support on-time delivery for customers. Operating Expenses Consolidated general and administrative expenses decreased by $3.6 million, or 5%. The decrease was primarily due to a change in estimate related to performance-based equity compensation and lower professional and consulting fees as a result of our initiative to reduce fees and internalize activities that were historically outsourced, more than offsetting incremental recruiting costs, and incremental severance costs. Change in the fair value of contingent consideration resulted in a gain of $0.2 million. Consolidated depreciation and amortization expense decreased by $1.3 million, or 7%, due to the decrease in the amortization of intangibles of $1.8 million, driven by a subset of intangible assets acquired in January 2022, becoming fully amortized during the first quarter of 2023. Interest Income Consolidated interest income increased by $5.8 million, or 214%, due to higher cash on hand during the six months ended June 30, 2024, coupled with higher interest rates. Interest Expense Consolidated interest expense decreased by $4.8 million, or 21%, primarily due to $74.3 million of principal pay downs on our Term Loan 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 decreased by $20.6 million, or 69%. The Company recorded income tax expense of $9.1 million for the six months ended June 30, 2024, compared to an expense of $29.7 million for the six months ended June 30, 2023. Our effective tax rate was 24.6% and 23.8% for the six months ended June 30, 2024 and 2023, respectively. The income tax expense for the six months ended June 30, 2024, was impacted 45 by legislation in Brazil which resulted in a local tax incentive no longer being exempt from federal income tax beginning in 2024. Additionally, tax expense of $0.5 million was recorded discretely related to equity-based compensation. The tax expense for the six months ended June 30, 2023, was unfavorably impacted by higher income reported in non-U.S. jurisdictions, partially offset by benefits related to excess stock compensation deductions of $1.2 million recorded discretely. Liquidity and Capital Resources Divestiture of Investment in Equity Securities In June 2024, we divested 100 percent of our equity investment in preferred stock of a private company we purchased in 2021. We received $12.0 million in proceeds for the divestiture. The proceeds were received in July 2024, therefore we recorded a receivable in the amount of $12.0 million in Prepaid expenses and other on the condensed consolidated balance sheet at June 30, 2024. No gain or loss resulted from the transaction. Cash Flows (in thousands) Six Months Ended June 30, 2024 2023 Net cash provided by operating activities $ 51,459 $ 66,356 Net cash used in investing activities (4,488) (9,424) Net cash used in financing activities (4,144) (39,314) Effect of exchange rate changes on cash and cash equivalents (9,587) 4,447 Net change in cash and cash equivalents $ 33,240 $ 22,065 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 June 30, 2024, our cash balance was $282.3 million, of which $45.5 million was held outside the U.S., and net working capital was $511.4 million. We had outstanding borrowings of $236.0 million under our $575 million Term Loan Facility and $184.1 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 six months ended June 30, 2024, cash provided by operating activities was $51.5 million, of which $61.7 million was generated from net income as adjusted for the impact of non-cash expenses, consisting primarily of depreciation and amortization, amortization of developed technology, and equity-based compensation. For the six months ended June 30, 2023, cash provided by operating activities was $66.4 million, of which $139.8 million was generated from net income as adjusted for the impact of non-cash expenses, consisting primarily of deferred tax expense, depreciation and amortization, equity-based compensation and both a $30.5 46 million increase in accounts payable and a $22.8 million decrease in inventory. These increases were partially offset by an $81.0 million increase in accounts receivable and a $64.1 million decrease in deferred revenue. Investing Activities For the six months ended June 30, 2024, net cash used in investing activities was $4.5 million, all of which was related to the purchase of property, plant and equipment, net of dispositions. For the six months ended June 30, 2023, net cash used in investing activities was $9.4 million, all of which was related to the purchase of property, plant and equipment. Financing Activities For the six months ended June 30, 2024, net cash used in financing activities was $4.1 million, driven primarily by a $12.7 million net reduction of other debt and $2.2 million in payments on our Term Loan Facility, as well as $1.4 million in TRA payments issued during the six months ended June 30, 2024. For the six months ended June 30, 2023, net cash used in financing activities was $39.3 million, driven primarily by $22.2 million in payments on our Term Loan Facility and a $14.5 million net reduction of other debt. 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 June 30, 2024, we posted surety bonds in the total amount of approximately $197.8 million. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. 47 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 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. Goodwill Our goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired. Goodwill impairment testing requires significant judgment and management estimates, including, but not limited to, the determination of (i) the number of reporting units, (ii) the goodwill and other assets and liabilities to be allocated to the reporting units and (iii) the fair values of the reporting units. The estimates and assumptions described above, along with other factors such as discount rates, will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses. We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment on an annual basis during the fourth quarter of each year, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If we use a qualitative approach and determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we would then perform the first step of the goodwill impairment test, which would consist primarily of a discounted cash flow (“DCF”) analysis compared to a guideline publicly-traded companies (“GPC”) analysis to determine the fair value of the reporting unit. 48 During the second quarter of 2024, we noted facts and circumstances around our STI Operations reporting unit Goodwill, were indicative that the fair value could be less than its carrying value. Accordingly, with the assistance of a third-party specialist, we performed the first step of the goodwill impairment test (“Step One”). The Step One impairment test consisted primarily of a DCF analysis compared to a GPC analysis to determine the fair value of the STI reporting unit. The significant assumptions used in determining the fair values primarily related to the selection of EBITDA multiples used in the GPC analysis, and the revenue growth rate, the forecasted EBITDA margin, and the selected discount rate used in the DCF model. As a result of the Step One impairment test performed, we concluded the fair value of Goodwill of the STI reporting unit was greater than its carrying value, thus the STI reporting unit was not impaired as of June 30, 2024. Long-lived Assets We review long-lived assets, including our finite-lived intangible assets, for impairment whenever events or changes in circumstances, indicate that the carrying value of the long-lived assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. During the second quarter of 2024, we noted facts and circumstances indicated that the STI asset groups may not be recoverable, and that the carrying value may not be recoverable. We performed a recoverability test over our asset groups by comparing the sum of the estimated undiscounted future cash flows of the STI asset groups to the carrying amounts at June 30, 2024. The result of the recoverability test indicated the sum of the expected future undiscounted cash flows was greater than the carrying amount of the STI asset groups. Accordingly, we concluded the long-lived assets of STI were not impaired as of June 30, 2024. 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.