Shoals Technologies Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Shoals manufactures electrical balance-of-systems products and solutions for solar, battery storage, and EV charging. Most revenue comes from solar system solutions, primarily in the U.S.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $105.1 million | $68.0 million | +55% |
| Gross profit / margin | $48.3 million / 45.9% | $26.3 million / 38.7% | Margin +7.2 percentage points |
| Operating income | $26.1 million | $10.0 million | +161% |
| Net income | $17.0 million | $4.6 million | +265% |
| Net income attributable to Shoals Technologies Group | $14.3 million | $2.6 million | +442% |
| Basic and diluted EPS | $0.10 | $0.02 | — |
| Adjusted EBITDA (non-GAAP) | $36.1 million | $16.5 million | — |
| Adjusted diluted EPS (non-GAAP) | $0.14 | $0.05 | — |
Revenue growth reflected higher sales volumes—especially system solutions—and, to a lesser extent, higher pricing. System solutions generated $91.3 million, or 86.9% of revenue, compared with $46.8 million a year earlier; component revenue declined to $13.8 million from $21.1 million. Management attributed higher gross margin to system-solution pricing, slightly lower raw-material costs, manufacturing efficiencies, and fixed-cost leverage.
- Operating costs: General and administrative expense rose 44% to $20.0 million, primarily due to higher equity compensation, including costs mainly related to the former CEO’s disability termination, and increased headcount. Interest expense increased 56% to $6.0 million, primarily reflecting higher borrowing rates.
- Cash flow: Operating activities generated $9.9 million, versus $25.9 million used in Q1 2022. The current-period result included net income and higher accounts payable, partly offset by $28.1 million of increased receivables and unbilled receivables and higher inventory. Capital expenditures were $2.0 million; financing used $10.2 million. Cash declined $2.3 million during the quarter.
- Liquidity and debt: Cash was $6.5 million at March 31, 2023. Term-loan borrowings were $194.8 million and revolver borrowings were $45.0 million; the filing reports $239.8 million of total borrowings and $105.0 million of remaining revolver availability. Term-loan interest was 10.59%; revolving-credit rates ranged from 7.88% to 8.09%. The company reported compliance with its debt covenants.
- Balance sheet: Current assets were $183.4 million and current liabilities $64.8 million. Deferred tax assets increased to $476.3 million from $291.6 million. Total assets were $808.6 million and total liabilities $302.5 million at quarter-end.
Material changes and business developments
- Backlog and awarded orders totaled $527.5 million at March 31, up 75% year over year and 23% from December 31, 2022. This included $227.6 million of signed purchase orders or take-or-pay commitments and $299.9 million of awarded orders awaiting signed contracts.
- In March, the founder-related selling stockholders completed a secondary sale of 24.5 million Class A shares; Shoals received no proceeds. Continuing equity owners also exchanged 31.4 million LLC interests and Class B shares for newly issued Class A shares. At quarter-end, Shoals owned 100% of Shoals Parent, with no Class B shares or non-controlling interests outstanding.
- Management said scaled production and order deliveries for its EV charging system solution continued. It also reported that 14 of the top 15 and 17 of the top 25 solar EPCs used its combine-as-you-go system; 15 additional EPCs and developers were in transition to the system.
Outlook, risks, and unusual items
- Guidance: The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management said operating cash flow and available revolver capacity should meet near- and long-term cash needs.
- Warranty exposure: Customers reported excessive insulation shrinkback in certain wire harnesses, which management initially linked to a subset of wire from one supplier. The company substantially ceased using that wire. Costs to repair or replace affected harnesses are considered probable but could not yet be reasonably estimated; the company expects its warranty accrual to increase and says the amount may be material. It does not carry product-warranty insurance.
- Supply chain and macro risks: Inflation, elevated logistics and input costs, supplier and cross-border delays, and possible U.S.–China trade or tariff changes may affect costs and production. Shoals continued to carry higher raw-material inventories. Higher interest rates raise debt costs and may also affect customer project financing. Management reported no material financial impact from these broader trends other than increased interest expense as of quarter-end.
- Legal matter: On May 4, 2023, after quarter-end, Shoals filed patent-infringement complaints with the ITC and two federal district courts against Hikam and Voltage concerning photovoltaic connectors. The company seeks exclusion and cease-and-desist orders, injunctive relief, and damages; the outcome and financial impact are not yet predictable.
- Other notable items: Equity-based compensation was $7.5 million, up from $3.8 million; $32.5 million of compensation cost remained unrecognized at quarter-end. Management cited elevated interest rates, supply-chain uncertainty, regional-bank stability, customer concentration, product performance, and intellectual-property enforcement among relevant risks. Disclosure controls were assessed as effective.
Investor verification priorities
- Track the scope, remediation plan, supplier recovery, and eventual cost estimate for the wire-harness shrinkback issue and its effect on warranty expense and cash flow.
- Assess the quality and conversion timing of the $299.9 million in awarded orders that were not yet under signed contract, as well as the pace of backlog fulfillment.
- Monitor gross-margin sustainability, including pricing, product mix, input costs, and manufacturing efficiencies.
- Review floating-rate debt costs, revolver usage and availability, covenant headroom, and the company’s ability to generate cash as receivables and inventory grow.
- Follow the patent proceedings, the potential impact of higher deferred tax assets and the March ownership exchanges, and any subsequent changes to management, guidance, or risk disclosures.