Shoals Technologies Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results. Shoals manufactures electrical balance-of-system (EBOS) products and solutions for solar projects.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $59.8 million | $52.6 million | $165.2 million | $136.8 million |
| Gross profit / margin | $21.8 million / 36.4% | $20.7 million / 39.3% | $66.7 million / 40.4% | $51.7 million / 37.8% |
| Operating income | $9.6 million | $15.1 million | $33.6 million | $30.1 million |
| Net income attributable to Shoals | $2.5 million | $15.0 million | $4.2 million | $29.5 million |
| Class A diluted EPS | $0.02 | $0.02 | $0.02 | Not comparable; pre-IPO structure |
| Operating cash flow | Not separately presented for the quarter | $(6.7) million | $38.1 million |
Q3 revenue rose 14%; gross margin declined from 39.3% to 36.4%, which management attributed partly to a higher share of lower-margin component sales. Nine-month revenue increased 21%, while gross margin improved, supported by purchasing, planning, design and manufacturing efficiencies and a higher share of system solutions. Shoals’ reported nine-month net income included a $16.0 million debt-repayment loss; the company reported Adjusted EBITDA of $51.6 million and Adjusted Net Income of $35.0 million for the period, both non-GAAP measures.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $14.2 million. Shoals had $39.9 million available under its revolving facility.
- Outstanding borrowings were reported as $257.9 million; debt net of deferred financing costs was $252.3 million. The term loan and revolver carried interest rates of 4.25% and 3.75%, respectively. The company reported covenant compliance.
- Nine-month operating cash use of $6.7 million reflected increases in receivables, unbilled receivables, inventory and other assets. Investing cash use was $15.4 million, including $12.9 million for ConnectPV. Financing provided $26.2 million.
- Total liabilities were $393.9 million, compared with assets of $382.8 million; stockholders’ deficit was $11.1 million. The balance sheet included a $121.5 million deferred tax asset and a $107.9 million tax receivable agreement (TRA) liability.
Material changes and business developments
- System-solutions revenue was $38.6 million in Q3, up from $37.0 million; component revenue was $21.2 million, up from $15.6 million. For the first nine months, system solutions grew to $123.3 million from $91.4 million, while components declined to $41.9 million from $45.4 million.
- General and administrative expense increased 185% in Q3 to $10.0 million, primarily reflecting higher headcount, public-company costs, equity compensation, insurance and $1.7 million of ConnectPV acquisition expenses.
- In August, Shoals acquired ConnectPV for $13.8 million cash, net of cash acquired, plus 209,437 Class A shares valued at $6.5 million. Preliminary acquisition accounting recorded $19.1 million of goodwill.
- At September 30, backlog and awarded orders totaled $270.7 million, up 101% year over year. This included $112.6 million of signed purchase orders or contractual take-or-pay commitments and $158.1 million of awarded orders for which contracts were not yet signed.
- Shoals completed a July follow-on offering. The company’s ownership of Shoals Parent was 62.44% at quarter-end; the remaining economic interest was held by non-controlling owners.
Outlook, commentary and risks
- Management said operating cash flow and revolver availability should cover near-term cash needs; no specific revenue or earnings guidance was provided. Management expected higher interest expense in 2021 due to higher average borrowings.
- Shoals planned to introduce its first EV-charging product offerings in Q4 2021, including prefabricated charging solutions and wiring products.
- Management cited project delays caused by delays in other parts of customer systems and warned that COVID-19 variants, component shortages, transportation disruption and other supply-chain constraints could affect operations and results.
- Customer concentration is notable: one customer accounted for 22.5% of nine-month revenue and 24.4% of receivables at September 30. The company also identified raw-material costs, including copper and aluminum, as factors affecting margins and said it does not hedge those costs.
- The TRA requires payment to former owners of 85% of specified realized tax benefits. The recorded $107.9 million liability depends in part on future taxable income and tax assumptions. Surety bonds had a maximum potential payment obligation of $12.6 million.
- Management reported no litigation it believed would have a material adverse effect, and no material change to previously disclosed risk factors other than risks related to integrating ConnectPV. Disclosure controls were assessed as effective.
Investor verification points
- Track working-capital conversion, especially receivables, unbilled receivables and inventory, given the shift to negative operating cash flow.
- Determine whether the awarded-order portion of backlog converts into signed contracts and revenue on expected timing.
- Assess whether gross margins recover or remain pressured by product mix, input costs and supply-chain conditions.
- Review ConnectPV integration, acquisition assumptions and whether anticipated synergies support the recorded goodwill.
- Evaluate debt service and liquidity alongside the TRA liability and the taxable-income assumptions underlying it.
- Monitor customer concentration and the realization of the company’s EV-charging product plans.