Shoals Technologies Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Shoals manufactures electrical balance-of-systems products and solutions for solar, battery storage and EV charging, with sales primarily in the U.S. Results are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $134.2 million | $90.8 million | $358.5 million | $232.3 million |
| Gross profit / margin | $14.2 million / 10.5% | $36.0 million / 39.7% | $112.9 million / 31.5% | $90.9 million / 39.1% |
| Operating income (loss) | $(10.6) million | $20.0 million | $47.2 million | $43.0 million |
| Net income (loss) | $(9.8) million | $12.8 million | $26.1 million | $24.7 million |
| Net income (loss) attributable to Shoals | $(9.8) million | $8.0 million | $23.4 million | $15.0 million |
| Basic and diluted EPS | $(0.06) | $0.07 | $0.14 | $0.13 |
- Revenue grew 48% in Q3 and 54% for the first nine months, driven by higher solar EBOS volumes and demand for combine-as-you-go system solutions.
- Q3 gross profit fell 61% year over year; the margin decline primarily reflects $50.2 million of wire insulation shrinkback warranty expense. Excluding the related costs, company-reported adjusted gross margin was 48.0% for Q3 and 48.7% for the nine-month period, versus 39.7% and 39.1%. These are non-GAAP measures and should not be treated as substitutes for GAAP results.
- Q3 G&A expense rose 63% to $22.6 million, including increased staffing, equity compensation, legal fees and travel. Nine-month interest expense increased 44% to $18.4 million amid higher borrowing rates.
- Operating cash flow was $65.5 million for the first nine months, versus $5.0 million a year earlier. Cash and cash equivalents were $9.2 million at September 30. Receivables and unbilled receivables increased substantially, together absorbing $70.4 million of cash during the period.
Financial position and liquidity
- Total debt, net of financing costs, was $190.4 million at September 30, including $193.8 million outstanding on the term loan and no revolver borrowings; the revolver had $149.4 million available. Debt was $239.1 million at December 31, 2022.
- The term loan carried an 11.27% rate (SOFR plus 5.75%) at quarter-end. Shoals reported compliance with debt covenants, including the 6.50-to-1.00 maximum consolidated leverage ratio.
- Investing cash outflow was $7.9 million and financing cash outflow was $57.1 million for the first nine months. Management said operating cash flow and revolver availability should meet near- and long-term cash needs.
Material changes, outlook and risks
- Wire insulation shrinkback: Shoals recorded $59.7 million of warranty expense for the matter in the first nine months, including $50.2 million in Q3. The recorded liability was $56.6 million at quarter-end. The estimated loss range is $59.7 million to $184.9 million; the high end exceeds the recorded amount by $125.2 million. Estimates depend on uncertain repair scope, failure rates, labor and material costs, and remediation methods. The company has no product-warranty insurance and has not recognized any potential recovery from Prysmian.
- Shoals sued wire supplier Prysmian on October 31, 2023, seeking damages and recovery of remediation costs; the outcome and any recovery are uncertain. The company also has patent infringement actions against Hikam and Voltage; the ITC hearing was scheduled for March 2024, with a target investigation completion date of November 2024.
- Backlog and awarded orders totaled $633.3 million, up 34% year over year and 16% from June 30: $267.3 million of signed backlog and $366.0 million of awarded orders not yet under signed contract. These figures are not equivalent in contractual certainty.
- One customer represented 34.1% of nine-month revenue and 41.3% of receivables at September 30, versus 9.0% and 8.4%, respectively, in the comparable disclosures.
- Management cited higher interest rates, inflation and possible supply-chain, tariff and logistics disruptions as risks. It reported no material adverse financial effects from these trends through the first three quarters other than increased interest expense. No specific numerical earnings or revenue guidance is provided in the filing.
- The July 2023 elimination of the Up-C structure generated a $5.1 million income tax benefit and increased deferred tax assets. Shoals also completed an equity-structure conversion; the March secondary stock offering was by selling holders, and the company received no proceeds.
Investor verification priorities
- Track the scope, remediation costs and updated loss range for the wire matter; compare estimates and cash payments with the recorded liability, and monitor the Prysmian litigation without assuming recovery.
- Assess whether revenue growth converts into cash, especially given the increase in receivables and unbilled receivables and the concentration in one customer.
- Check the status and conversion of awarded orders into signed backlog and delivered revenue.
- Monitor gross margins and operating performance both on a GAAP basis and alongside the company’s non-GAAP adjustments.
- Review borrowing costs, debt covenant headroom, revolver availability and the company’s ability to fund operations and obligations.