Shoals Technologies Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Shoals makes electrical balance-of-systems solutions and components for solar, battery storage, and EV charging, with most revenue from U.S. solar customers.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $119.2 million | $73.5 million | $224.3 million | $141.5 million |
| Gross profit | $50.5 million | $28.6 million | $98.8 million | $54.9 million |
| Gross margin | 42.4% | 38.9% | 44.0% | 38.8% |
| Operating income | $31.6 million | $13.0 million | $57.7 million | $23.0 million |
| Net income attributable to Shoals | $18.9 million | $4.4 million | $33.2 million | $7.0 million |
| Diluted EPS | $0.11 | $0.04 | $0.21 | $0.06 |
- Growth and margins: Q2 revenue rose 62% year over year and six-month revenue rose 59%. Management attributed growth to higher solar EBOS demand, more customers and projects, and adoption of its combine-as-you-go system solutions. Higher system-solutions mix, lower input costs, fixed-cost leverage, and operating efficiencies supported margin expansion; increased warranty expense partly offset those benefits.
- Cash flow: Six-month operating cash flow was $37.8 million, versus cash used of $6.7 million a year earlier. Capital expenditures were $4.4 million. Receivables and unbilled receivables increased by a combined $51.8 million, consuming working capital.
- Liquidity and debt: Cash was $5.9 million at June 30, 2023. Borrowings totaled approximately $214.3 million, including $194.3 million on the term loan and $20.0 million on the revolver. Revolver availability was $129.4 million; Shoals reported covenant compliance. Term-loan interest was 10.98%, and revolver interest ranged from 8.32% to 8.48%.
- Balance sheet: Accounts receivable rose to $97.1 million from $50.6 million at year-end 2022. Deferred tax assets increased to $470.3 million from $291.6 million; the filing reports a $187.6 million noncash deferred-tax-asset recording associated with exchanges of Class B shares. The company completed exchanges that left it with no Class B shares or outside LLC-interest holders; the founder’s March secondary sale generated no proceeds for Shoals.
Changes, outlook, and risks
- Backlog and awarded orders totaled $546.1 million at June 30, up 67% year over year and 4% from March 31. This included $303.7 million of signed backlog and $242.4 million of awarded orders not yet under signed contract. System solutions represented 86.2% of six-month revenue.
- No specific full-year numerical guidance is provided in the supplied filing text. Management said operating cash flow and revolver availability should meet near- and long-term cash needs, while noting that results are not necessarily indicative of the full year.
- Warranty matter: Customers reported wire-insulation “shrinkback” in a subset of harnesses, believed by Shoals to involve wire from one supplier. The company stopped using that wire and recorded a $9.3 million liability, the low end of its estimated range. It cannot estimate the upper end, has no warranty insurance, and has not included potential supplier recovery; a further accrual could be material.
- Other risks and developments: The filing cites elevated interest and operating costs, supply-chain and logistics uncertainty, tariffs and geopolitical risk, and possible impacts from banking instability. Shoals filed patent-infringement actions against Hikam and Voltage seeking exclusion orders, injunctive relief, and damages; outcomes and financial impacts are not predictable. Surety-bond maximum potential obligations were $30.0 million. Brandon Moss became CEO effective July 17, 2023.
Important facts for investors to verify
- How the affected wire-harness population and repair/replacement costs develop, and whether supplier recovery is available.
- Whether backlog and awarded orders convert to signed contracts and revenue on expected timing and margins.
- Receivables collection and working-capital trends, given the large year-over-year increase in receivables.
- Debt-service sensitivity to floating interest rates, revolver availability, and continued covenant compliance.
- Developments and costs in the patent litigation and the CEO transition.