Shoals Technologies Group, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Shoals provides electrical balance of system (EBOS) solutions and components for solar energy projects, primarily in the United States. Products include cable assemblies, fuses, combiners, disconnects, monitoring systems, junction boxes and related enclosures. Approximately 66% of 2020 revenue came from customized system solutions and 34% from individual components; 99% of revenue was from U.S. customers.
The filing covers the fiscal year ended December 31, 2020. Shoals Technologies Group, Inc. was formed in November 2020 to facilitate the IPO and was largely a holding company before the IPO; the operating results presented are those of Shoals Parent LLC and its subsidiaries.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $175.5 million | $144.5 million | Up 21% |
| Gross profit | $66.5 million | $44.2 million | Up 51% |
| Gross margin | 37.9% | 30.6% | Up approximately 7.3 percentage points |
| Income from operations | $37.3 million | $26.9 million | Up 38% |
| Net income | $33.8 million | $25.1 million | Up 34% |
| Adjusted EBITDA | $60.9 million | $36.8 million | Up 66% |
| Adjusted net income | $56.3 million | $33.9 million | Up 66% |
| Cash flow from operations | $54.1 million | $36.2 million | Up 49% |
| Capital expenditures | $3.2 million | $1.7 million | Up $1.5 million |
Revenue growth was attributed to higher demand for solar EBOS products, particularly combine-as-you-go system solutions, and an increase of 43 customers. Gross margin improved because of purchasing efficiencies, better material planning, product-design improvements, manufacturing efficiencies and a more favorable product mix.
General and administrative expense increased 132% to $21.0 million, primarily because of $8.3 million of equity-based compensation, higher IPO-related professional fees, increased headcount and bonuses. Net income included significant non-cash and other adjustments; 2020 equity-based compensation was $8.3 million and COVID-19 costs were $2.9 million.
Liquidity, cash flow and debt
- Cash and cash equivalents at December 31, 2020 were $10.1 million.
- Gross borrowings were $370.0 million, consisting principally of a $350.0 million term loan and $20.0 million drawn under the revolving credit facility; net debt after deferred financing costs was approximately $358.8 million.
- The company had $80.0 million of availability under its $100.0 million revolving facility.
- All outstanding debt was variable-rate debt. The term loan rate was 4.25% and the revolver rate was 3.75% at year-end. Management estimated that a 100-basis-point increase in rates would increase annual interest expense by approximately $3.6 million.
- Operating cash flow was $54.1 million, while investing cash flow was negative $3.2 million and financing cash flow was negative $47.9 million.
- Financing cash flows included a $355.8 million special distribution to members, $20.2 million of tax distributions and $26.3 million of senior-debt repayments, partly offset by new borrowings.
- The company was in compliance with its debt covenants at December 31, 2020. The debt is secured by substantially all assets of the borrowers and guarantors.
- Surety bonds had a maximum potential payment obligation of $11.8 million at year-end.
Material changes versus the prior comparable period
- Revenue increased 21%, led by increased adoption of combine-as-you-go systems. System-solution revenue increased to $116.7 million from $74.2 million, while component revenue decreased to $58.8 million from $70.3 million.
- Gross margin expanded from approximately 31% to 38%, despite $2.6 million of COVID-19 costs included in cost of revenue.
- Operating expenses increased 69%, mainly because of equity-based compensation and IPO preparation costs.
- Interest expense nearly doubled to $3.5 million because of increased borrowings under the new Senior Secured Credit Agreement entered into in November 2020.
- Inventory increased to $15.1 million from $8.8 million, while accounts receivable remained broadly stable at $27.0 million.
- Debt increased materially from $26.1 million, net of deferred financing costs, at December 31, 2019 to $358.8 million at December 31, 2020.
- Members’ equity moved from $149.9 million to a deficit of $184.1 million, primarily because of the $376.0 million of member distributions, partially offset by net income and equity-based compensation.
IPO, outlook, management commentary and unusual items
On January 29, 2021, Shoals completed an IPO of 11.55 million Class A shares at $25.00 per share and received $278.8 million of net proceeds. Approximately $150.0 million was used in January 2021 to repay term-loan borrowings. The company became the sole managing member of Shoals Parent and owned a 56.14% economic interest immediately following the organizational transactions; the remaining 43.86% was held by continuing equity owners.
The filing does not provide formal revenue, earnings or margin guidance. Management’s stated growth opportunities include converting additional customers to combine-as-you-go systems, launching products in additional EBOS categories, expanding internationally, pursuing battery-storage and EV-charging opportunities, and replacing failed competitor products. The company expected to introduce EV-charging offerings in 2022.
Management stated that operating cash flows were expected to meet near-term cash needs. However, interest expense was expected to increase in 2021, and the filing estimated an approximately $16.0 million first-quarter 2021 loss on debt repayment from the write-off of financing costs and the prepayment premium related to the $150.0 million term-loan repayment.
COVID-19 caused a short-term work stoppage and resulted in $2.9 million of costs in 2020. The company reported continued operations and normal delivery turnaround times but identified ongoing risks from supplier, customer, workforce and project-site disruptions.
The Tax Receivable Agreement requires payments to Oaktree and the founder equal to 85% of certain realized or deemed-realized tax benefits. Based on the IPO and merger transactions, estimated payments were approximately $2.2 million to $3.5 million annually over the next 15 years, subject to significant uncertainty. Change-of-control or early-termination provisions could accelerate payments.
Principal risks and contingencies
- Dependence on continued growth in solar installations, government incentives, renewable-energy regulations and project financing.
- Customer concentration: the largest customer represented approximately 22% of 2020 revenue, the two largest represented approximately 40%, and the five largest represented approximately 65%.
- Manufacturing and supply-chain exposure, including vendor concentration, imported components, tariffs, commodity-price volatility and potential quality problems.
- Product defects or EBOS failures could result in warranty, indemnity, product-liability, reputational and replacement costs.
- High leverage, variable interest rates, LIBOR transition risk and restrictive debt covenants could reduce financial flexibility.
- Backlog of $98.3 million and awarded orders of $59.1 million may not convert to revenue or expected margins because of delays, cancellations or customer issues.
- Intellectual-property protection, infringement claims, cybersecurity, data privacy, environmental compliance and international expansion risks.
- The company is a holding company dependent on distributions from Shoals Parent and does not expect to pay cash dividends in the foreseeable future.
- As an emerging growth company and newly public issuer, Shoals was not required to provide management’s assessment or an auditor attestation of internal control over financial reporting for this filing, although management concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether strong 2020 margin performance is sustainable after excluding COVID-19 costs, equity compensation and other non-recurring items.
- The post-IPO debt balance, actual interest rates, debt-prepayment costs and compliance with financial covenants.
- Conversion of the reported backlog and awarded orders into revenue, cash collections and expected margins.
- Customer concentration, receivables exposure and the financial condition of major EPC customers.
- The timing and amount of Tax Receivable Agreement payments and any related liquidity impact.
- Actual international, battery-storage, EV-charging and new-product adoption compared with management’s stated growth strategy.
- Potential warranty, product-liability, supply-chain, tariff and COVID-19 costs not fully reflected in 2020 results.
- The effects of the dual-class structure, continuing equity-owner exchanges, potential share issuance and Oaktree/founder governance rights.