Array Technologies, Inc. 10-Q

Item 2. 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, our Quarterly Report on Form 10-Q for the three months ended June 30, 2024 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 our 2023 Annual Report and the “Risk Factors” section 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 leading global manufacturer and supplier 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 nine months ended September 30, 2024, we derived 70% and 30% of our revenues from customers in the U.S. and the rest of the world, respectively. As of September 30, 2024, we had shipped approximately 79.9 gigawatts of trackers to customers worldwide. Our corporate headquarters are located in Albuquerque, New Mexico. As of September 30, 2024, we had 961 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 $4.4 million and $4.1 million during the three months ended September 30, 2024 and 2023, respectively, of which $1.6 million and $2.0 million were related to R&D activities performed by the Company during the same period, respectively. Total engineering expense was $12.7 million and $12.3 million during the nine months ended September 30, 2024 and 2023, respectively, of which $5.3 million and $6.4 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, Europe and in Brazil. 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 rose in 2022 and 2023, we saw 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 had customers delay planned installations in anticipation of interest reductions and more favorable project financing conditions later in 2024. The effects of the Federal Reserve’s decision to lower the target interest rate by 0.5% and the timing of any positive impact the lower rate may have on project timing remains uncertain. • 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 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. 36 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, as of September 30, 2024 we do not anticipate the ITC rate to impact our seasonality during that timeframe. 45X Credit After a period of uncertainty, on October 24, 2024 Treasury and the IRS issued final regulations for the 45X manufacturing credit benefits that largely confirmed our previous understanding around the eligibility of our torque tube and structural fasteners. 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 and structural fasteners. We continue to pursue additional agreements for splitting 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 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 the 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. 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 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. 37 Inflation Inflationary pressures may continue to negatively impact our results of operations in the near-term. 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. 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 made its preliminary affirmative determination on October 1, 2024. The preliminary tariff rates varying from below 1% to almost 300%, depending on the relevant company. 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. In September 2024, the USDOC released its final determination from their investigations against aluminum extrusions from multiple countries. On October 30, 2024, the USITC voted to find no injury in its pending AD/CVD investigation, meaning that the USDOC’s AD/CVD orders will not go into effect. The coalition of petitioners may still appeal the USITC’s decision, and we will continue to monitor developments in the appeal process. If the USITC’s decision is overturned on appeal, 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 38 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. 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, commodity prices and availability of government incentives to the end-users of our products. Our revenue growth is dependent on continued growth in the size and number of solar energy projects installed each year, as well as our ability to maintain market share in each geography where we compete, expand our global footprint to new and evolving markets, grow our production capabilities to satisfy demand, and continue 39 to develop and introduce new innovative products that integrate emerging technologies and the performance requirements of our customers. A majority of our revenue is recognized over time as work progresses, and for single performance obligations, we use an input measure, the cost-to-cost method, to determine progress. We review and update the contract related estimates on an ongoing basis and recognize adjustments for any project specific facts and circumstances that could impact the measurement of the extent of progress, such as the total costs to complete the contracts, under the cumulative catch-up method. Due to the relatively short duration of our outstanding performance obligations, and our ability to estimate the remaining costs to be incurred, which are substantially all material costs covered under our material supply agreements with our suppliers, we have not recorded any material catch-up adjustments for the periods presented that would have impacted revenues or EPS related to revisions in our measurement of remaining progress of our performance obligations. Cost of Revenue and Gross Profit Cost of revenue consists primarily of product costs, including raw materials, purchased components, salaries, wages and benefits of manufacturing personnel, freight, tariffs, customer support, product warranty, amortization of developed technology, and depreciation of manufacturing and testing equipment. Our product costs are affected by (i) the underlying cost of raw materials, including steel and aluminum, (ii) component costs, including electric motors and gearboxes, (iii) technological innovation, and (iv) economies of scale and improvements in production processes and automation. We may experience disruptions to our supply chain and increased material and freight costs like those experienced in 2021 and 2022 during the COVID-19 pandemic. When possible, we modify our production schedules and processes to mitigate the impact of these disruptions and cost increases on our margins. We do not currently hedge against changes in the price of our raw materials. Gross profit may vary from quarter to quarter and is primarily affected by our volume, ASPs, product costs, project mix, customer mix, geographical mix, commodity prices, logistics rates, warranty costs, and seasonality. Inflation Reduction Act Vendor Rebates On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law, which includes numerous green energy credits. The 45X Advanced Manufacturing Production Tax Credit (“45X Credit”) was established as part of the IRA. The 45X Credit is a per-unit tax credit that is earned over time for each clean energy component domestically produced and sold by a manufacturer. We have, and will continue to, enter into arrangements with manufacturing vendors that produce 45X Credit eligible parts, in which the vendors agree to share a portion of the benefit received related to our purchases, in the form of “Vendor Rebates.” We account for these Vendor Rebates as a reduction of the purchase prices of the vendors’ products and therefore a reduction in the cost of inventory until the inventory is sold, at which time we recognize such rebates as a reduction of cost of product and service revenue on the condensed consolidated statements of operations. Rebates related to purchases that were made prior to the execution of the agreements are deferred and recognized as a reduction of the prices of future purchases. Operating Expenses General and administrative expense consists primarily of salaries, benefits, and equity-based compensation related to our executive, sales, engineering, finance, human resources, information technology, and legal personnel, as well as travel, facility costs, marketing, bad debt provision, and professional fees. The majority of our sales in the nine months ended September 30, 2024 and 2023, were in the U.S.; however, in January 2022, we expanded our international operations with the STI Acquisition. We currently have a sales presence 40 in the U.S., Spain, Brazil, South Africa, Australia, and the U.K. We intend to continue to expand our sales presence and marketing efforts to additional countries. Contingent consideration consists of the changes in fair value of the tax receivable agreement (“TRA”) entered into with a former indirect stockholder, concurrent with the acquisition of Patent LLC by Former Parent. The TRA liability was recorded at fair value as of July 8, 2016 (the “Patent Acquisition Date”) and subsequent changes in the fair value are recognized in earnings. For discussion and analysis of the TRA see Note 11 – Commitments and Contingencies . Depreciation consists of costs associated with property, plant and equipment not used in manufacturing of our products. We expect that as we continue to grow both our revenue and our general and administrative personnel, we may require some additional property, plant and equipment to support this growth resulting in additional depreciation expense. Amortization consists of the expense recognized over the expected period of use of our customer relationships, contractual backlog, and STI trade name intangible assets. Amortization related to certain acquired intangible assets is recorded as Total cost of revenue under the caption "Amortization of developed technology." Non-Operating Expenses Interest income consists of interest earned on our cash and cash equivalents balance. Interest expense consists of interest and other charges paid in connection with our Senior Secured Credit Facility, the Convertible Notes, and Other Debt held by our STI Operations. We are subject to U.S. federal, state and non-U.S. income taxes. As we expand into additional foreign markets, we may be subject to additional foreign tax. Reportable Segments Subsequent to the acquisition of STI, the Company began reporting its results of operations in two segments; the Array Legacy operating segment and the newly acquired STI Legacy operating segment (“STI Legacy Operations”) pertaining to legacy STI operations. The segment amounts included in this Item 2. Management’s Discussion and Analysis are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 14 – Segment Reporting in the accompanying notes to the condensed consolidated financial statements. 41 Results of Operations The following table sets forth our consolidated statement of operations (in thousands, except percentages): Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease) 2024 2023 $ % 2024 2023 $ % Revenue $ 231,406 $ 350,438 $ (119,032) (34) % $ 640,575 $ 1,234,936 $ (594,361) (48) % Cost of revenue Cost of product and service revenue 149,452 259,419 (109,967) (42) % 410,299 892,696 (482,397) (54) % Amortization of developed technology 3,639 3,640 (1) — % 10,918 10,918 — — % Total cost of revenue 153,091 263,059 (109,968) (42) % 421,217 903,614 (482,397) (53) % Gross profit 78,315 87,379 (9,064) (10) % 219,358 331,322 (111,964) (34) % Operating expenses General and administrative 40,149 37,432 2,717 7 % 114,904 115,825 (921) (1) % Change in fair value of contingent consideration (39) 190 229 121 % (271) 2,232 2,503 112 % Depreciation and amortization 8,880 9,552 (672) (7) % 27,384 29,361 (1,977) (7) % Goodwill impairment 162,000 — (162,000) (100) % 162,000 — 162,000 (100) % Total operating expenses 210,990 47,174 163,816 347 % 304,017 147,418 156,599 106 % (Loss) income from operations (132,675) 40,205 (172,880) (430) % (84,659) 183,904 (268,563) (146) % Other loss, net (682) (446) (236) 53 % (1,662) (127) (1,535) 1209 % Interest income 4,223 3,425 798 23 % 12,685 6,124 6,561 107 % Foreign currency (loss) gain, net (106) 207 (313) (151) % (1,073) 273 (1,346) (493) % Interest expense (8,264) (13,064) 4,800 37 % (25,818) (35,372) (9,554) (27) % Total other expense, net (4,829) (9,878) 5,049 51 % (15,868) (29,102) (13,234) (45) % (Loss) income before income tax expense (137,504) 30,327 (167,831) (553) % (100,527) 154,802 (255,329) (165) % Income tax expense 3,850 7,229 (3,379) (47) % 12,964 36,904 (23,940) (65) % Net (loss) income $ (141,354) $ 23,098 $ (164,452) (712) % $ (113,491) $ 117,898 $ (231,389) (196) % 42 The following table provides details on our operating results by reportable segment for the respective periods (in thousands, except percentages): Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease) 2024 2023 $ % 2024 2023 $ % Revenue Array Legacy Operations $ 160,266 $ 244,857 $ (84,591) (35) % $ 459,807 $ 895,322 $ (435,515) (49) % STI Operations 71,140 105,581 (34,441) (33) % 180,768 339,614 (158,846) (47) % Total $ 231,406 $ 350,438 $ (119,032) (34) % $ 640,575 $ 1,234,936 $ (594,361) (48) % Gross Profit Array Legacy Operations $ 65,726 $ 58,233 $ 7,493 13 % $ 192,118 $ 241,019 $ (48,901) (20) % STI Operations 12,589 29,146 (16,557) (57) % 27,240 90,303 (63,063) (70) % Total $ 78,315 $ 87,379 $ (9,064) (10) % $ 219,358 $ 331,322 $ (111,964) (34) % Comparison of the three and nine months ended September 30, 2024 and 2023 Revenue Consolidated revenue decreased $119.0 million, or 34%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily driven by lower revenue from Array Legacy Operations of 35% and STI Operations of 33%. Array Legacy Operations revenue decreased by $84.6 million, or 35%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily driven by a decrease of approximately 35% in volume. Revenue from STI Operations decreased by $34.4 million, or 33% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease was primarily driven by a decrease of approximately 13% in volume, a decrease of approximately 12% in average selling prices and a foreign currency impact of approximately 7%. Consolidated revenue decreased $594.4 million, or 48%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by lower revenue from Array Legacy Operations of 49% and STI Operations of 47%. Array Legacy Operations revenue decreased by $435.5 million, or 49%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by a decrease of approximately 46% in volume and a decrease of approximately 5% in average selling prices. Revenue from STI Operations decreased by $158.8 million, or 47% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily driven by a decrease of approximately 31% in volume, a decrease of approximately 19% in average selling prices and a foreign currency impact of approximately 3%. 43 Cost of Revenue and Gross Profit Consolidated cost of revenue decreased by $110.0 million, or 42%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, in line with lower revenue, combined with lower input costs per watt, resulting from supply chain and engineering cost control initiatives and the realization of 45X benefits associated with torque tubes and structural fasteners. Consolidated gross profit decreased by $9.1 million, or 10%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross Margin increased to 34% for the three months ended September 30, 2024, as compared to 25% during the same period in the prior year. Array Legacy Operations gross profit increased by $7.5 million, or 13%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross margin increased to 41% from 24% for the three months ended September 30, 2024 and 2023, respectively. The increase in gross margin was driven by the realization of 45X benefits associated with torque tubes and structural fasteners during the quarter. STI Operations gross profit decreased by $16.6 million, or 57%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Gross margin for STI Operations decreased to 18% from 28% for the three months ended September 30, 2024 and 2023, respectively, driven primarily by a decline in average selling prices of approximately 12%, partially offset by lower commodity prices. Consolidated cost of revenue decreased by $482.4 million, or 53%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, in line with lower revenues and the realization of 45X benefits associated with torque tubes and structural fasteners. Consolidated gross profit decreased by $112.0 million, or 34%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross margin increased to 34% for the nine months ended September 30, 2024, as compared to 27% during the same period in the prior year. Array Legacy Operations gross profit decreased by $48.9 million, or 20%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross margin at Array Legacy Operations increased to 42% from 27% for the nine months ended September 30, 2024 and 2023, respectively. The increase in gross margin was driven by the realization of 45X benefits associated with torque tubes and structural fasteners. In addition, the Company also recognized a one-time $4.0 million settlement with one of our vendors during the first quarter of 2024, which was recorded as a reduction of cost of product and service revenue. STI Operations gross profit decreased by $63.1 million, or 70%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Gross margin for STI Operations decreased to 15% from 27% for the nine months ended September 30, 2024 and 2023, respectively, in line with lower revenue and a decrease in average selling prices of 19%, partially offset by lower commodity prices. Operating Expenses Consolidated general and administrative expenses for the three and nine months ended September 30, 2024 increased by $2.7 million, or 7%, and decreased by $0.9 million, or 1%, respectively, compared to the three and nine months ended September 30, 2023. The increase during the third quarter of 2024 was primarily due to an increase of $2.0 million in legal and other professional fees, an increase of $1.6 million in an allowance 44 for credit risk related to one customer in Brazil, partially offset by lower personnel expenses as a result of lower stock-based compensation expense and lower headcount. General and administrative expenses decreased during the nine months ended September 30, 2024 due to $4.4 million of lower personnel expenses as a result lower stock-based compensation expense and lower headcount, partially offset by an increase of $3.4 million in an allowance for credit risk related to a limited number of customers in Brazil. Change in the fair value of contingent consideration for the three and nine months ended September 30, 2024 resulted in a loss of $39 thousand and a gain of $0.3 million, respectively, compared to the three and nine months ended September 30, 2023. Consolidated depreciation and amortization expense for the three and nine months ended September 30, 2024 decreased by $0.7 million, or 7%, and $2.0 million, or 7%, respectively, compared to the three and nine months ended September 30, 2023. The decrease was primarily due to certain assets acquired becoming fully amortized. During the three months ended September 30, 2024, the Company identified certain indicators of impairment, which resulted in an impairment of goodwill of $162.0 million. See Note 5 – Goodwill and Other Intangibles for additional information. Interest Income Consolidated interest income for the three and nine months ended September 30, 2024 increased by $0.8 million, or 23%, and $6.6 million, or 107%, respectively, compared to the three and nine months ended September 30, 2023, primarily as a result of higher cash on hand and higher yields on our cash management program. Interest Expense Consolidated interest expense for the three and nine months ended September 30, 2024 increased by $4.8 million, or 37%, and $9.6 million, or 27%, respectively, compared to the three and nine months ended September 30, 2023, primarily due to the impact of the $74.3 million of principal pay downs on our Term Loan Facility during 2023. These pay downs were the result of focused efforts to decrease our outstanding debt balance with free cash flows from operations. Income Tax Expense Consolidated income tax expense for the three and nine months ended September 30, 2024 decreased by $3.4 million, or 47%, and $23.9 million, or 65%, respectively, compared to the three and nine months ended September 30, 2023. The Company recorded income tax expense of $3.9 million and $13.0 million, respectively, for the three and nine months ended September 30, 2024, compared to income tax expense of $7.2 million and $36.9 million, respectively, for the three and nine months ended September 30, 2023. Our effective tax rate was (2.8)% and (12.9)% for the three and nine months ended September 30, 2024, respectively, and 23.8% for both the three and nine months ended September 30, 2023. No tax benefit was recorded from the goodwill impairment recorded for the three months ended September 30, 2024 as the goodwill is non-deductible for income tax purposes. Our effective tax rate, excluding the impact of the goodwill impairment was 15.7% and 21.1% for the three and nine months ended September 30, 2024. The tax expense for the three months ended September 30, 2024, was favorably impacted by lower profits in non- 45 US jurisdictions and additional tax credits recorded during the period. This is partially offset by legislative changes in Brazil where a local tax incentive is no longer exempt from federal income tax beginning in 2024. Tax expense for the three months ended September 30, 2023 was unfavorably impacted by higher income reported in non-U.S. jurisdictions. The Company recorded income tax expense of $13.0 million for the nine months ended September 30, 2024, compared to an expense of $36.9 million for the nine months ended September 30, 2023. Income tax expense for the nine months ended September 30, 2024 was favorably impacted by lower profits in non-US jurisdictions and additional tax credits recorded during the period. This was partially offset by legislative changes in Brazil where a local tax incentive is no longer exempt from federal income tax beginning in 2024. Additionally, tax expense of $0.5 million related to equity-based compensation, was recorded discretely. Tax expense for the nine months ended September 30, 2023 was unfavorably impacted by higher income reported in non-U.S. jurisdictions, offset by a tax benefit of $1.2 million related to equity-based compensation, recorded discretely. Liquidity and Capital Resources Divestiture of Investment in Equity Securities In June 2024, we divested 100% 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 in July 2024. No gain or loss resulted from this transaction. Cash Flows (in thousands) Nine Months Ended September 30, 2024 2023 Net cash provided by operating activities $ 96,394 $ 137,974 Net cash used in investing activities 6,409 (11,615) Net cash used in financing activities (12,241) (84,442) Effect of exchange rate changes on cash and cash equivalents (7,270) (1,808) Net change in cash and cash equivalents $ 83,292 $ 40,109 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 of 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, 2024, our cash balance was $332.4 million, of which $24.1 million was held outside the U.S., and net working capital was $527.4 million. We had outstanding borrowings of $235.0 million under our $575 million Term Loan Facility and $183.6 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, 2024, cash provided by operating activities was $96.4 million attributable to a net loss of $113.5 million and a net cash outflow of $1.9 million from changes in our operating 46 assets and liabilities, offset by non-cash adjustments of 211.8 million, mainly consisting of goodwill impairment charges, depreciation and amortization expense and equity-based compensation. 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 during the period. Investing Activities For the nine months ended September 30, 2024, net cash provided by investing activities was $6.4 million, of which $12.0 million was related to sale of an equity investment in a private company, partially of by $5.6 million of purchases of property, plant and equipment, net of dispositions. 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. Financing Activities For the nine months ended September 30, 2024, net cash used in financing activities was $12.2 million, driven primarily by a $24.9 million net reduction of other debt and $3.2 million in payments on our Term Loan Facility, as well as $1.4 million in TRA payments issued during the nine months ended September 30, 2024. For the nine months ended September 30, 2023, net cash used in financing activities was $84.4 million, driven primarily by $73.2 million in payments on our Term Loan Facility and a $8.5 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. 47 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, 2024, we posted surety bonds in the total amount of approximately $198.2 million. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources. Critical Accounting Policies and Significant Management Estimates 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 using the income approach, with the resulting value compared to GPC marketplace EBITDA multiples to corroborate the fair value of the reporting unit. During the quarter ended September 30, 2024, the Company experienced a sustained decline in its stock price, which hit a 52-week low during the quarter, resulting in a decrease in market capitalization. In addition, the Company updated its long-term projections for the Company’s reporting units and evaluated the execution risk associated with the Company’s projections. As a result, the Company identified indicators of impairment related to the Company’s reporting units. Management, with the assistance of a third-party valuation specialist, performed an interim quantitative goodwill impairment test of the Legacy Array Operations and STI Operations reporting units as of September 30, 2024. As a result of this test, the Company recorded an impairment of goodwill of $162.0 million related to the STI Operations reporting unit. The estimated fair value of the Array Legacy Operations reporting unit was significantly higher than the carrying balance of the reporting unit. Subsequent to recording the impairment of goodwill, the Company reconciled the overall market capitalization of the Company, within a reasonable range, to the sum of the estimated fair values of both of the Company’s reporting units. The significant assumptions used in determining the fair value of the Company’s reporting units primarily relate to the revenue growth rate, the forecasted EBITDA margin, and the selected discount rate used in the discounted cash flow model under the income approach. Under the GPC method, the selection of EBITDA multiples to be used requires significant judgement. To the extent that the discount rate used in determining the present value of our cash flows increases, if we do not meet the cash flow projections for the reporting unit, or GPC multiples in the future decrease, additional impairment charges may be recorded in the future. In addition, a further decrease in the Company’s common stock share price and market capitalization over a sustained period of time could be an indication that there has been a further decrease in the fair value of the Company’s reporting units. The most significant assumption used in determining the estimated fair value of STI Operations is the discount rate assumption. A 100-basis point increase in the discount rate would potentially result in an incremental 48 goodwill impairment of $40 million. A 100-basis point decrease in the discount rate would result in a reduction in the goodwill impairment of $48 million. For a further discussion of our critical accounting estimates, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 28, 2024. There have been no material changes to the critical accounting estimates disclosed in such Annual Report on Form 10-K other than what has been disclosed above. 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.