Shoals Technologies Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Shoals manufactures electrical balance-of-system (EBOS) solutions and components for solar, battery storage and EV charging applications. The filing is unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $90.8 million | $59.8 million | $232.3 million | $165.2 million |
| Gross profit / margin | $36.0 million / 39.7% | $21.8 million / 36.4% | $90.9 million / 39.1% | $66.7 million / 40.4% |
| Operating income | $20.0 million | $9.6 million | $43.0 million | $33.6 million |
| Net income | $12.8 million | $5.3 million | $24.7 million | $6.1 million |
| Net income attributable to Shoals Technologies Group, Inc. | $8.0 million | $2.5 million | $15.0 million | $4.2 million |
| Class A diluted EPS | $0.07 | $0.02 | $0.13 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $26.6 million | $16.9 million | $62.9 million | $51.6 million |
| Adjusted diluted EPS (non-GAAP) | $0.10 | $0.07 | $0.22 | $0.21 |
Q3 revenue increased 52% year over year; nine-month revenue increased 41%. Management attributed growth to higher solar EBOS demand, adoption of combine-as-you-go system solutions, EV product sales and the ConnectPV acquisition. Q3 gross margin improved with a larger mix of higher-margin system solutions. Nine-month gross margin declined year over year, reflecting higher materials and logistics costs in the first half.
Cash flow, liquidity and debt
- For the first nine months, operating cash flow was positive $5.0 million, compared with negative $6.7 million in 2021. Working-capital demands included a $43.6 million inventory increase and a $40.1 million increase in accounts receivable; higher accrued expenses and payables partly offset these uses.
- Investing cash outflow was $2.9 million, primarily capital expenditures. Financing cash inflow was $19.9 million, including $30.5 million of net revolver borrowings and offset by distributions and other payments.
- At September 30, cash and cash equivalents were $11.2 million. Restricted cash was $20.4 million, bringing cash, cash equivalents and restricted cash to $31.6 million.
- Gross borrowings were approximately $281.4 million: $195.8 million under the term loan and $85.6 million under the revolver. Debt net of deferred financing costs was $276.9 million. The revolver had $64.4 million of availability under its $150 million commitment.
- Term-loan and revolver rates were based on SOFR plus 3.25%; the filing reports rates of 5.94% and 5.41%–6.89%, respectively, at quarter-end. The company reported covenant compliance; the first-lien secured leverage ratio limit was 6.50:1.00 beginning September 30, 2022.
- Current assets were $183.2 million and current liabilities $70.4 million. Inventory was $81.2 million and accounts receivable $71.7 million.
Material changes and business indicators
- Q3 operating income more than doubled year over year, while interest expense rose 33% to $4.8 million, reflecting higher borrowing rates and increased borrowings.
- Nine-month G&A expense rose 53% to $41.0 million, including higher equity compensation, staffing and public-company and professional costs.
- The prior-year nine-month comparison included a $16.0 million loss on repayment of term debt; there was no such charge in 2022. The 2021 comparison also included a tax-receivable-agreement adjustment not repeated in 2022.
- System solutions accounted for about 74.5% of nine-month revenue. At September 30, backlog and awarded orders totaled $471.2 million, up 74% year over year and 44% from June 30. Of this, $199.3 million was signed backlog or contractual minimum commitments; $271.9 million consisted of awarded orders for which contracts were not yet signed.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management said it expected operating cash flows and revolver availability to meet near- and long-term cash needs, and reported strong order flow for EV charging products with scaled production underway. Shoals launched four EV product families and said UL certification was complete for many products, with the remainder expected by year-end 2022.
Management cited supply and logistics disruption, inflation, higher interest rates, rising input and freight costs, and the Ukraine conflict’s effect on material availability and logistics. The company increased raw-material inventory to mitigate supply risk and said these events had not yet materially adversely affected financial results. It also flagged trade restrictions, tariffs, solar-module supply and trade investigations as potential sources of project delays, demand volatility and margin pressure. Other risks include solar-market cyclicality, dependence on policy and incentives, product warranty or quality claims, and debt-related constraints.
- The tax receivable agreement liability totaled $161.0 million, including a $3.6 million current portion. The agreement generally requires payment to beneficiaries of 85% of specified realized or deemed tax benefits; certain change-of-control events or termination could trigger an accelerated payment.
- Surety bonds had a maximum potential payment obligation of $16.0 million. Management said it did not believe pending legal matters would have a material adverse effect.
- The company reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether the $271.9 million in awarded orders converts into signed contracts and ships on expected schedules.
- Whether revenue growth and Q3 margin improvement persist as product mix, input costs, freight and supply availability change.
- Whether inventory and receivables convert to cash, given the working-capital outflow and increased revolver use.
- Exposure to floating-rate debt, covenant headroom and the impact of future rate changes on interest expense.
- The timing and amount of Tax Receivable Agreement payments, and any potential accelerated payment obligations.
- Progress on EV product certifications and production scale-up, and the extent to which EV sales contribute materially to results.