Array Technologies(ARRY) - 2022 Q4 - Annual Report

Preliminary Notes Explanatory Note and Restatement The company restated its 2022 interim financial statements due to misstatements in STI acquisition accounting, rendering prior reports unreliable - The 10-K report includes a restatement of interim financial statements for the first three quarters of 2022 (the "Non-Reliance Periods")[16] - The restatement was necessary due to errors in accounting for the January 2022 acquisition of STI, including incorrect valuation of intangible assets and goodwill, improper currency allocation, and incorrect capitalization of an asset that should have been expensed[17] - Investors are advised to rely solely on the financial data for the restated periods as presented in this 10-K, not on previously filed Form 10-Q reports or related communications[18] Internal Control Considerations Management identified material weaknesses in internal controls over financial reporting as of December 31, 2022, and is actively remediating them - Management identified material weaknesses in internal control over financial reporting as of December 31, 2022, rendering disclosure controls and procedures ineffective[20] - Remediation steps are being taken to address the identified material weaknesses, as detailed in Part II, Item 9A of the report[20] Part I Business Array Technologies manufactures utility-scale solar tracking systems, expanded globally via the STI acquisition, and benefits from IRA incentives - The company is one of the world's largest manufacturers of ground-mounting tracking systems for utility-scale solar energy projects[23] - On January 11, 2022, the company acquired STI Norland, a Spanish solar tracker manufacturer, for $410.5 million in cash and 13.9 million shares of common stock, accelerating its international expansion[27] - The product portfolio includes the flagship DuraTrack® HZ v3, the dual-row Array STI H250, and the terrain-flexible Array OmniTrack, all supported by SmarTrack software[31][32][33] - The passage of the Inflation Reduction Act (IRA) in August 2022 raised the Investment Tax Credit (ITC) to 30% until 2032, which is expected to stabilize demand and reduce the seasonality previously driven by ITC step-downs[54][59] - As of December 31, 2022, the company had 1,082 full-time employees, with approximately 51% located in the U.S.[63] Risk Factors The company faces risks from STI integration, supply chain, raw material prices, government policies, substantial debt, and internal control weaknesses - The company has faced challenges integrating STI's business and consolidating financial reporting from acquired foreign subsidiaries[70] - Business is exposed to changes in the global trade environment, including tariffs on steel and solar modules, and potential supply chain disruptions from policies like the Uyghur Forced Labor Prevention Act (UFLPA)[91][94] - The reduction or elimination of government incentives, such as the ITC and PTC recently modified by the Inflation Reduction Act (IRA), could harm business. Failure to meet the IRA's domestic content requirements could also negatively impact sales[94][96] - The company has substantial indebtedness, including $312.5 million under its Senior Secured Credit Facility and $425.0 million in Convertible Notes as of December 31, 2022, which could adversely affect financial flexibility[137] - Internal control deficiencies constituting material weaknesses have been identified, which could impact the ability to accurately report financial results. These relate to the control environment, inventory, revenue recognition, accounts receivable, financial reporting, and foreign currency[157][159] Properties The company occupies 2.7 million square feet globally, with owned headquarters in Albuquerque and leased facilities across the U.S., Spain, and Brazil - The company's global footprint includes approximately 2.7 million square feet of office, manufacturing, and warehouse space[164] - Key owned properties include the corporate headquarters and manufacturing facility in Albuquerque, NM, and office and manufacturing space in Spain. Major leased facilities are located in the U.S., Spain, and Brazil[164] Legal Proceedings The company settled a trade secret lawsuit for $42.8 million and is defending against class action and derivative lawsuits alleging securities misstatements - The company settled litigation related to trade secret misappropriation against Nextracker, receiving a $42.8 million payment in August 2022[228][564] - The company is defending against a putative class action and derivative lawsuits alleging violations of securities laws related to its IPO and follow-on offerings, with the class period from October 14, 2020, to May 11, 2021[565][566][567] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq (ARRY); the company retains earnings for growth, not paying common dividends, while preferred dividends accrue in kind until 2026 - Common stock is traded on the Nasdaq Global Market under the symbol "ARRY"[168] - The company does not expect to pay cash dividends on common stock in the foreseeable future, intending to retain earnings for growth[169] - Dividends on the Series A Preferred Stock accrue in kind until August 11, 2026, after which they become payable in cash[170] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenue grew 92% to $1.64 billion, gross margin improved to 13.9%, and net income reached $4.4 million, driven by the STI acquisition and a legal settlement Year Ended December 31, (in thousands) | | Year Ended December 31, | | Change | |---|---|---|---| | (in thousands) | 2022 | 2021 | $ | % | | Revenue | $1,637,546 | $853,318 | $784,228 | 92% | | Cost of revenue | 1,410,270 | 770,459 | 639,811 | 83% | | Gross profit | $227,276 | $82,859 | $144,417 | 174% | | Gross Margin | 13.9% | 9.7% | | | | Income (loss) from operations | (18,133) | (24,741) | 6,608 | (27)% | | Net income (loss) | $4,432 | $(50,403) | $54,835 | 109% | - The 92% revenue growth in 2022 was driven by $369.7 million from the STI acquisition and a $414.6 million (49%) increase in the Array Legacy segment, which saw a 22% increase in megawatts shipped and a 21% increase in average selling prices[221][222] - Gross margin improved from 9.7% in 2021 to 13.9% in 2022, primarily due to improved pass-through pricing of commodity costs in the Array Legacy segment[223] - A legal settlement related to trade secret misappropriation resulted in $42.8 million of income in 2022, significantly contributing to the company's return to profitability[228] - Net cash provided by operating activities was $141.5 million in 2022, a significant improvement from the $263.2 million of cash used in 2021. This was driven by higher net income (adjusted for non-cash items) and favorable changes in working capital, including an increase in deferred revenue[249][254] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from customer concentration, unhedged commodity price volatility (steel, aluminum), variable interest rates on debt, and foreign currency fluctuations - The company has significant customer concentration risk. As of December 31, 2022, the five largest customers accounted for 23.4% of total accounts receivable. During 2022, two customers each accounted for over 10% of total revenue (11.8% and 10.6%)[283][285] - The business is subject to commodity price risk from fluctuating market prices of steel and aluminum, which are key raw materials. The company does not use hedging arrangements to mitigate this risk[286] - As of December 31, 2022, $344.2 million of the company's long-term debt is subject to variable interest rates. A 50 basis point increase in rates would increase annual interest expense by approximately $1.7 million[288] - With expanded international operations, the company is subject to foreign currency exchange risk and has a policy to manage this exposure through non-financial techniques[290] Financial Statements and Supplementary Data This section presents the 2022 consolidated financial statements, with the auditor providing an unqualified opinion on financials but an adverse opinion on internal controls - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects[345] - The auditor issued an ADVERSE opinion on the company's internal control over financial reporting as of December 31, 2022, due to the identification of multiple material weaknesses[346][356] - A critical audit matter identified was the valuation of intangible assets (customer relationships, backlog, trade name) acquired in the STI business combination, which involved significant management judgment and complex assumptions[349][350][351] Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal controls, particularly concerning the STI acquisition and foreign currency, and is implementing a remediation plan - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of December 31, 2022[295] - Multiple material weaknesses were identified, including deficiencies in entity-level controls (control environment, risk assessment) and control activities related to inventory, revenue recognition, accounts receivable, financial reporting/consolidation, business combinations, and foreign currency[298][300] - Specific material weaknesses were also identified relating to the acquired STI operations, including inadequate IT general controls and a lack of formal accounting policies and procedures[300] - A remediation plan is in progress, focusing on hiring qualified personnel, enhancing monitoring controls, implementing information system improvements, and formalizing policies with the assistance of an outside firm[304][305][306] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information on directors, executive officers, corporate governance, compensation, and principal accountant fees is incorporated by reference from the forthcoming 2023 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees and Services (Item 14) is incorporated by reference from the forthcoming 2023 Proxy Statement[313][315][316] Part IV Exhibit and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the 10-K, including key corporate documents and certifications - This section provides an index of all exhibits filed with the 10-K, including the Purchase Agreement for the STI acquisition, credit agreements, and executive certifications[317][318]