Array Technologies Stock Write Up
Company:
Array Technologies sells ground-mounting solar tracking systems to engineering, procurement and construction firms (“EPCs”) that build solar energy projects and to large solar developers.
Product:
The company’s main product is the DuraTrack HZ, which is a single axis solar tracker. “The industry-leading DuraTrack HZ single-axis tracker is the most widely-deployed tracking system in the world, delivering the best value to solar asset owners through the highest reliability and the lowest cost of ownership” (https://www.solaris-shop.com/brands/Array-Technologies.html).
The product offers superior returns to Array’s customers on a ROI basis. Array estimates because of the use of their simple single motor system, that their system will require 433 times fewer service hours than their largest competitor’s system. Array’s tracker system uses less than one motor per megawatt which compares with more than 25 motors per megawatt for the largest competitor. The product also offers safe-stow technology in the event of high winds; the usually cause of damage on these systems. Customers care a lot about maintenance costs, as they can have a significant impact on the owner’s return on investment.
Market:
From 2017 to 2019, U.S. installations of trackers for systems with more than one megawatt of capacity grew at a compound annual growth rate of 35%, approximately 1.5 times faster than the compound annual growth rate of installations of all ground-mounted solar generation over the same period, according to IHS Markit. All ground mounted solar systems themselves have had a compound annual growth rate of 20%.
Government clean energy mandates, or Renewable portfolio standards, which mandate that a certain percentage of electricity sold in the jurisdiction by a certain date must come from renewable energy resources are currently enforced in 30 states. RPS’s are expected to grow, especially if president Biden pledges to put the USA on track to 100% renewable energy by 2050.
LCOE represents the average cost per unit of electricity of building, financing, operating and maintaining a power plant over its operating life. Solar energy projects that use trackers generate up to 25% more energy and deliver a 22% lower levelized cost of energy (“LCOE”) than projects that use “fixed tilt” mounting systems, according to BloombergNEF. Trackers represent between 10% and 15% of the cost of constructing a ground-mounted solar energy project, and approximately 70% of all ground-mounted solar energy projects constructed in the U.S. during 2019 utilized trackers according to BloombergNEF and IHS Markit, respectively.
The U.S. Energy Information Administration estimates that the LCOE for new solar generation capacity entering service in 2021 is $37.44 per megawatt hour without federal tax incentives and $28.88 per megawatt hour with federal tax incentives, which is lower than the cost of building new power plants that burn natural gas or coal and lower than the cost of operating existing fossil fuel generation in certain instances.
Customers:
Array’s main customers are engineering, procurement and construction firms (“EPCs”) that build solar energy projects and to large solar developers. Given the nature of the solar ground mounting industry and business, the majority of revenues are generated from a handful of customers. For the nine months ended September 30, 2020, the Company’s largest customer and five largest customers constituted 14.3% and 45.9% of total revenues, respectively. Two customers made up 24.5% of revenue and are the only customers greater than 10% of total revenue for the nine months ended September 30, 2020. This is an improvement from the same time period last year. For the nine months ended September 30, 2019, the Company’s largest customer and five largest customers constituted 21.1% and 55.2% of total revenues, respectively.
Array’s customers are the beneficiaries of subsidies to lower the levelized cost of energy. Meaning if more subsidies given to solar developers there will be more large solar projects (greater than 1 MW) where solar trackers are most commonly implemented. Winning any additional project could dramatically change revenue for Array.
Opportunities:
Under a change in political leadership and stance on green energy initiatives, the industry leader in ground mounting solar projects will be the beneficiary of the incoming boon of solar projects due to subsidies lowering levelized cost of energy (LCOE) . Under president Biden, renewable portfolio standards (RPS) are likely to expand, mandating states to generate a certain percentage of their energy from renewable sources.
Biden is also expected to take down the 25% tariff placed on steel goods. Array technologies imports their steel products from China and will therefore experience a decrease in COGS following a reduction tariffs placed on raw materials.
Threats:
The largest threat to overall performance of the company is the rising cost of steel. Demand for steel is currently surging companies as the economy opens up. Approximately 80% of Array’s cost of goods sold consists of purchased components, including motors, gearboxes, electronic controllers and steel tubing that we source from third-party suppliers. This is important to highlight because the company does not currently hedge against changes in the price of raw materials. This means Array cannot guarantee a fixed price of cogs and earnings may deviate from expectations. They also depend upon a small number of outside vendors. Their supply chain operations could be disrupted if they encounter problems with these vendors.
Because the company relies heavily on a few customers for the majority of the revenue, any loss or failure to perform contractual obligations will greatly affect the financial performance.
Additionally, under the current text of the legislation, the tax credits for Array phase down over a four-year period beginning in 2020 as follows: 30% for 2019, 26% for 2020, 22% for 2021, and 10% for 2022 or later. The reduction in tax credits will adversely affect the companies ability to generate free cash flow- an issue compounded by high levels of growth.
The company is an expected beneficiary of a democratic president. A split house or senate may adversely affect any stimulus aimed to benefit Array.
Financial Standing:
Cash:
As of September the company is sitting on $310,626,000 of cash. Working capital balances out to $29,064,000 (Current Assets — Current Liabilities)=> ($619,684,000 — $590,620,00= $29,064,000). It is essential to note that the largest line item of liabilities is deferred revenue at $328,781,000.
Debt:
On October 14, 2020, the company entered into a new credit senior credit facility consisting of (i) a $575 million senior secured seven-year term loan facility (the “New Term Loan Facility”) and (ii) a $150 million senior secured 5-year revolving credit facility (the “New Revolving Credit Facility” and, together with the New Term Loan Facility, the “New Senior Secured Credit Facility”). Array used $105 million of our initial public offering (“IPO”) proceeds to pay down the balance of the New Term Loan Facility to $470 million, and the remaining proceeds for general corporate purposes, including working capital, operating expenses and capital expenditure. Essentially the company has no debt and is prepaying a line of credit.
I believe that the company took on a line of credit due to negative free cash flow. However, the negative free cash flow is a direct result of deferred revenues. The debt was taken on as a pre-emptive move to prevent cash shortages due to a failure to cope with drastic growth.
Dividends:
The company does not plan on issuing any dividends for the foreseeable future.
Opinion:
Macroeconomic factors are extremely favorable for the company. I believe that the solar industry as a whole will benefit the most out of all green energy fields. Solar is very much the industry leader as far as investment, and the other renewable energies are laggard proxies.
I additionally enjoy solar trackers growing at a compounded annual growth rate of 35% while all mounted solar projects are growing at 20%. I believe demand for Array’s services will boon as it relates to two aspects; 1) Decreases in LCOE as a result of efficiencies and subsidies and 2) growth in RPS’s on a national level. Finally, when looking at the largest solar developers across the country, they all are trying to buy land to place solar farms. Meaning that their key customers are trying to ramp up business themselves.
