Shoals Technologies (SHLS) - 2025 Q2 - Quarterly Report

Forward-Looking Statements Overview of Forward-Looking Statements The report's forward-looking statements are based on management's current beliefs and are subject to risks - Forward-looking statements cover future results, market expectations, business strategies, and potential risks[8] - Such statements involve known and unknown risks that may cause actual results to differ materially from expectations[9] - Readers should not place undue reliance on these statements, which reflect management's beliefs as of the report date[9] Key Risk Factors Key risks include solar demand, warranty estimates, supply chain disruptions, and macroeconomic conditions - Diminished demand for solar energy projects could materially adversely impact growth and financial results[11] - Failure to accurately estimate losses from the wire insulation shrinkback matter could materially impact profit margins[11] - Supply chain disruptions due to raw material flow interruptions or trade policy changes could adversely affect revenue[11] - Defects or performance problems in products can lead to equipment failure, reputational damage, and decreased revenue[12] - Macroeconomic conditions and intense market competition pose risks to business and financial results[12] - Ongoing patent infringement complaints and wire insulation shrinkback litigation present significant legal uncertainties[12] PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Balance Sheets | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $794,964 | $793,080 | | Total Current Assets | $190,073 | $188,352 | | Cash and cash equivalents | $4,686 | $23,511 | | Accounts receivable, net | $103,432 | $78,181 | | Inventory, net | $56,899 | $55,977 | | Total Liabilities | $219,557 | $236,280 | | Total Current Liabilities | $81,346 | $80,912 | | Warranty liability—current portion | $15,102 | $29,602 | | Total Stockholders' Equity | $575,407 | $556,800 | - Total assets increased slightly to $795.0 million, while cash and cash equivalents significantly decreased from $23.5 million to $4.7 million[15] - Total liabilities decreased to $219.6 million, primarily due to a reduction in the current portion of warranty liability from $29.6 million to $15.1 million[15] Condensed Consolidated Statements of Operations (Unaudited) Condensed Consolidated Statements of Operations | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $110,841 | $99,249 | $191,202 | $190,056 | | Gross profit | $41,202 | $39,997 | $69,342 | $76,457 | | Income from operations | $15,998 | $18,581 | $20,310 | $30,165 | | Net income | $13,855 | $11,802 | $13,573 | $16,576 | | Basic EPS | $0.08 | $0.07 | $0.08 | $0.10 | | Diluted EPS | $0.08 | $0.07 | $0.08 | $0.10 | - Quarterly revenue increased by 11.7% YoY to $110.8 million, while six-month revenue saw a modest 0.6% increase[16] - Quarterly net income grew 17.4% YoY to $13.9 million, but six-month net income decreased by 18.1% YoY to $13.6 million[16] - Gross profit percentage decreased to 37.2% for the quarter and 36.3% for the six months due to strategic pricing and product mix changes[157][164] Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric (in thousands, except shares) | Balance at Dec 31, 2024 | Balance at Jun 30, 2025 | | :--- | :--- | :--- | | Class A Common Stock Shares | 166,762,392 | 167,353,860 | | Class A Common Stock Amount | $2 | $2 | | Additional Paid-in Capital | $483,550 | $488,525 | | Treasury Stock Shares | 3,908,387 | 3,908,387 | | Treasury Stock Amount | $(25,331) | $(25,272) | | Retained Earnings | $98,579 | $112,152 | | Total Stockholders' Equity | $556,800 | $575,407 | - Total stockholders' equity increased to $575.4 million, driven by net income and equity-based compensation[18] - The company did not repurchase any shares of its common stock during the six months ended June 30, 2025[18][83] Condensed Consolidated Statements of Cash Flows (Unaudited) Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $1,737 | $50,701 | | Net Cash Used in Investing Activities | $(10,342) | $(4,485) | | Net Cash Used in Financing Activities | $(10,220) | $(65,734) | | Net Decrease in Cash and Cash Equivalents | $(18,825) | $(19,518) | | Cash and Cash Equivalents—End of Period | $4,686 | $3,189 | - Net cash from operating activities significantly decreased to $1.7 million from $50.7 million, primarily due to changes in working capital[21][185][186] - Net cash used in investing activities increased to $10.3 million, driven by higher purchases of property, plant, and equipment[21][187] - Net cash used in financing activities decreased to $10.2 million due to lower debt payments and reduced share repurchases[21][188][189] Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Organization and Business - Shoals Technologies Group, Inc. is a leading provider of electrical balance of systems (EBOS) solutions for the global energy transition market[25] - The company is headquartered in Portland, Tennessee, with five direct or indirect subsidiaries as of June 30, 2025[24][26] Note 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with U.S. GAAP, consolidating all subsidiaries[27][28] - Management makes significant estimates for revenue recognition, credit losses, warranty liability, and other key areas[32] Customer Concentration | Customer | 2025 Revenue % | 2025 Accounts Receivable % | 2024 Revenue % | 2024 Accounts Receivable % | | :--- | :--- | :--- | :--- | :--- | | Customer A | 17.5 % | 22.6 % | 35.2 % | 19.0 % | | Customer B | 14.5 % | 6.1 % | 8.1 % | 8.8 % | - Customer A's revenue concentration decreased significantly from 35.2% in 2024 to 17.5% in 2025 for the six-month period[33] - The company is evaluating the impact of new FASB ASUs related to income tax and expense disaggregation disclosures[35][38] Note 3. Accounts Receivable Accounts Receivable | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Accounts receivable | $103,928 | $78,677 | | Less: allowance for credit losses | $(496) | $(496) | | Accounts receivable, net | $103,432 | $78,181 | - Net accounts receivable increased by 32.3% to $103.4 million at June 30, 2025[40] Note 4. Inventory Inventory | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Raw materials | $58,876 | $55,703 | | Work in process | $1,949 | $2,316 | | Finished goods | $353 | $2,415 | | Allowance for obsolete or slow-moving inventory | $(4,279) | $(4,457) | | Inventory, net | $56,899 | $55,977 | - Net inventory increased slightly by 1.6% to $56.9 million, primarily due to an increase in raw materials[41] Note 5. Property, Plant and Equipment Property, Plant and Equipment | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Construction in progress | $20,156 | $3,968 | | Total PP&E | $56,961 | $41,284 | | Less: accumulated depreciation | $(14,983) | $(13,062) | | Property, plant and equipment, net | $41,978 | $28,222 | - Net property, plant, and equipment increased significantly by 48.8% to $42.0 million, driven by a substantial increase in construction in progress[43] - Depreciation expense for the six months was $2.8 million, up from $2.4 million in 2024[43][44] Note 6. Goodwill and Other Intangible Assets - Goodwill remained unchanged at $69.9 million as of June 30, 2025[45] Other Intangible Assets | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total amortizable intangibles | $102,200 | $102,200 | | Total accumulated amortization | $64,909 | $61,117 | | Total other intangible assets, net | $37,291 | $41,083 | - Net other intangible assets decreased by 9.2% to $37.3 million due to ongoing amortization[47] - Amortization expense for intangible assets was $3.8 million for the six months ended June 30, 2025, consistent with the prior year[47] Note 7. Accrued Expenses and Other Accrued Expenses and Other | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Accrued compensation | $4,626 | $5,005 | | Accrued interest | $344 | $259 | | Accrued rebates | $3,618 | $3,058 | | Accrued professional fees | $6,079 | $1,448 | | Other accrued expenses | $2,261 | $2,771 | | Total accrued expenses and other | $16,928 | $12,541 | - Total accrued expenses increased by 35.0% to $16.9 million, primarily due to a significant increase in accrued professional fees[48] Note 8. Warranty Liability - The estimated general warranty liability decreased from $1.1 million to $0.6 million at June 30, 2025[49] - The wire insulation shrinkback warranty liability remained at an estimated low-end loss of $73.0 million, with a remaining liability of $19.2 million[52] - No warranty expense related to wire insulation shrinkback was recorded in the first six months of 2025 or 2024[54] Warranty Liability Activity | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Warranty liability, beginning of period | $31,413 | $51,799 | $40,994 | $54,914 | | Warranty expense | $0 | $829 | $256 | $1,394 | | Payments | $(11,626) | $(5,298) | $(21,463) | $(8,978) | | Warranty liability, end of period | $19,787 | $47,330 | $19,787 | $47,330 | Note 9. Long-Term Debt Long-Term Debt | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Revolving Credit Facility | $131,750 | $141,750 | | Long-term debt, net of current portion | $131,750 | $141,750 | - Outstanding borrowings under the Revolving Credit Facility decreased by $10.0 million to $131.8 million[57] - As of June 30, 2025, the interest rate on the facility ranged from 7.11% to 7.17%, with $68.2 million of availability[64] - The company was in compliance with all required debt covenants as of June 30, 2025[66] Note 10. Earnings per Share ("EPS") Earnings per Share | Metric (in thousands, except per share) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net income - basic and diluted | $13,855 | $11,802 | $13,573 | $16,576 | | Weighted average shares outstanding - basic | 167,286 | 169,991 | 167,124 | 170,136 | | Weighted average shares outstanding - diluted | 167,562 | 170,100 | 167,238 | 170,252 | | Basic EPS | $0.08 | $0.07 | $0.08 | $0.10 | | Diluted EPS | $0.08 | $0.07 | $0.08 | $0.10 | - Basic and diluted EPS for Class A common stock were $0.08 for the three and six months ended June 30, 2025[70] Note 11. Equity-Based Compensation - The company granted 2.0 million Restricted Stock Units (RSUs) during the six months ended June 30, 2025[72] - 0.9 million Performance Stock Units (PSUs) were granted, cliff vesting after 3 years upon meeting performance targets[73][75] Equity-Based Compensation Expense | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Equity-based compensation expense | $2,594 | $4,087 | $5,255 | $9,110 | - Unrecognized compensation costs totaled $19.8 million as of June 30, 2025, to be recognized over a weighted average period of 2.2 years[75] Note 12. Stockholders' Equity - Holders of Class A common stock are entitled to one vote per share; no Class B common stock was outstanding[76] - A $150.0 million share repurchase program was announced on June 11, 2024[77] - No shares were repurchased under the program during the six months ended June 30, 2025, leaving $125.0 million authorized[83] Note 13. Commitments and Contingencies - The company is pursuing two intellectual property litigations against Hikam and Voltage for patent infringement[85][86][88][89] - The ITC reversed a finding of violation against Voltage, which the company has appealed[85] - A lawsuit was filed against Prysmian for damages caused by defective wire insulation shrinkback[90] - Multiple securities class action and derivative lawsuits have been filed against the company related to the wire insulation matter[91][92][95][96][97] - The maximum potential payment obligation for surety bonds was $5.8 million as of June 30, 2025[99] Note 14. Income Taxes Effective Tax Rate | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Effective tax rate for continuing operations | 28.5% | 27.1% | - The effective tax rate increased from 27.1% to 28.5% in H1 2025, primarily due to discrete items for equity awards and a state tax refund adjustment[102] Note 15. Revenue Recognition Revenue by Product Type | Product Type (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | System solutions | $84,412 | $79,292 | $141,806 | $144,350 | | Components | $26,429 | $19,957 | $49,396 | $45,706 | | Total revenue | $110,841 | $99,249 | $191,202 | $190,056 | - System solutions accounted for 74.2% of total revenue for the six months ended June 30, 2025[124] Contract Balances | Contract Balance (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Billed accounts receivable | $94,979 | $70,882 | | Retainage | $8,453 | $7,299 | | Contract assets | $1,591 | $4,251 | | Unbilled receivables | $9,861 | $20,834 | | Deferred revenue | $20,075 | $18,737 | | Accrued rebates | $3,618 | $3,058 | - Unbilled receivables decreased significantly from $20.8 million to $9.9 million, while billed accounts receivable increased[107] Note 16. Segment Reporting - The company operates as a single operating and reportable segment focusing on EBOS solutions and components[112] - The Chief Operating Decision Maker (CODM) reviews consolidated financial information for resource allocation[113][115] - All long-lived tangible assets are located within the United States[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, key operational trends, liquidity, and critical accounting policies Overview - Shoals is a leading provider of EBOS solutions and components for the global energy transition market[119] - The company's system solutions are primarily sold to EPCs for utility-scale solar projects in the U.S[120][122] - A strategic expansion into international, BESS, data center, and CC&I markets was announced in Q3 2024[123] Backlog and Awarded Orders | Metric | June 30, 2025 | | :--- | :--- | | Backlog and awarded orders | $671.3 million | | Backlog | $260.9 million | | Awarded orders | $410.4 million | | Estimated delivery in next 12 months (backlog) | $247.1 million | | Estimated delivery in next 12 months (awarded orders) | $293.2 million | | International projects (backlog and awarded orders) | >13.3% | | YoY increase in backlog and awarded orders | 4.4% | | QoQ increase in backlog and awarded orders | 4.1% | Trends and Uncertainties - The global trade environment is uncertain due to tariffs and trade restrictions, which could increase raw material costs[125][126][127][129] - The 2022 Inflation Reduction Act (IRA) incentivized solar development, but recent legislation modifies these provisions, potentially reducing future demand[133][134][135] - The U.S. solar market faces volatility but is poised for continued growth due to new manufacturing capacity[136] - Global inflationary pressures, higher interest rates, and supply chain challenges are expected to persist[138][139] Key Components of Our Results of Operations - Revenue is generated from EBOS solutions and components and is influenced by price, volume, and product mix[141][143] - Cost of revenue includes raw materials, shipping, warranty, and personnel, affecting gross profit[145] - Operating expenses consist of general and administrative costs, with personnel being the most significant component[146][147] - Non-operating expenses include interest expense, interest income, gain on asset sale, and income tax expense[151][152][153][154] Results of Operations Three Months Ended June 30 | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $110,841 | $99,249 | $11,592 | 11.7 % | | Cost of revenue | $69,639 | $59,252 | $10,387 | 17.5 % | | Gross profit | $41,202 | $39,997 | $1,205 | 3.0 % | | General and administrative expenses | $23,064 | $19,218 | $3,846 | 20.0 % | | Income from operations | $15,998 | $18,581 | $(2,583) | (13.9)% | | Net income | $13,855 | $11,802 | $2,053 | 17.4 % | - For the three months ended June 30, 2025, revenue increased by 11.7%, but gross profit percentage decreased to 37.2%[156][157] - General and administrative expenses increased by 20.0% for the three months, primarily due to a $3.0 million rise in legal expenses[158] Six Months Ended June 30 | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $191,202 | $190,056 | $1,146 | 0.6 % | | Cost of revenue | $121,860 | $113,599 | $8,261 | 7.3 % | | Gross profit | $69,342 | $76,457 | $(7,115) | (9.3)% | | General and administrative expenses | $44,757 | $41,990 | $2,767 | 6.6 % | | Income from operations | $20,310 | $30,165 | $(9,855) | (32.7)% | | Net income | $13,573 | $16,576 | $(3,003) | (18.1)% | - For the six months ended June 30, 2025, revenue increased by 0.6%, but gross profit decreased by 9.3%[163][164] - General and administrative expenses rose by 6.6% for the six months, driven by a $2.1 million increase in legal expenses[165] - Interest expense decreased by 39.9% for the six months due to lower outstanding debt balances[167] - A $3.1 million gain on asset sale was recognized due to the consolidation of operations[161][168] Non-GAAP Financial Measures - The company presents supplemental non-GAAP measures to provide additional insight into operational performance[170][171] - These measures exclude items like wire insulation shrinkback and litigation expenses to offer a clearer view of core business performance[170][176] Non-GAAP Reconciliation | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Adjusted Gross Profit | $41,202 | $40,463 | $69,342 | $76,923 | | Adjusted Gross Profit Percentage | 37.2 % | 40.8 % | 36.3 % | 40.5 % | | Adjusted EBITDA | $24,472 | $27,685 | $37,261 | $48,143 | | Adjusted Net Income | $16,938 | $17,808 | $22,137 | $30,445 | | Adjusted Diluted EPS | $0.10 | $0.10 | $0.13 | $0.18 | - Adjusted EBITDA decreased by 22.6% for the six months ended June 30, 2025, compared to the prior year[175] - Adjusted Diluted EPS decreased from $0.18 to $0.13 for the six months ended June 30, 2025, compared to the prior year[177] Liquidity and Capital Resources - Operations are financed primarily through operating cash flows and borrowings, with resources deemed sufficient[178] - Cash and cash equivalents decreased from $23.5 million to $4.7 million at June 30, 2025[179] - Net cash provided by operating activities was $1.7 million, a significant decrease from $50.7 million in the prior year[179][185] - Net cash used in investing activities was $10.3 million, primarily for property and equipment purchases[187] - Net cash used in financing activities was $10.2 million, reflecting payments on the Revolving Credit Facility[188] - Approximately $20.7 million of cash was used for wire insulation shrinkback remediation during the six months[183] Critical Accounting Policies and Accounting Estimates - The company performs an annual goodwill impairment assessment in Q4 or more frequently if indicators exist[195] - Fair value determinations for goodwill require significant judgment and are sensitive to changes in assumptions[196] - Despite a decline in market capitalization, management does not believe the reporting unit's fair value is below its carrying value[197][198] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposure are reported for the period - No material changes in market risk exposure occurred during the six months ended June 30, 2025[199] - For a detailed analysis of market risk, refer to the 2024 Form 10-K[199] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures as of the reporting date - Disclosure controls and procedures were evaluated and concluded to be effective at the reasonable assurance level as of June 30, 2025[201] - No changes to internal control over financial reporting occurred during the quarter that materially affected controls[202] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings detailed in the financial statement notes - The company is involved in various litigation types, including intellectual property, contract, and warranty claims[204] - Except as detailed in Note 13, no current claims are believed to have a material adverse effect on the business[204] - The results of litigation are uncertain and may involve significant costs and diversion of management resources[204] Item 1A. Risk Factors Readers are directed to the 2024 Form 10-K for a comprehensive discussion of risk factors - Readers should refer to the risk factors in the 2024 Form 10-K for material factors affecting the business[205] - The disclosed risk factors may not cover every risk, and additional unknown risks could adversely affect the company[205] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds occurred during the period[206] Item 3. Defaults Upon Senior Securities No defaults upon senior securities are reported for the period - Not applicable; no defaults upon senior securities[207] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not applicable; no mine safety disclosures[208] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the period - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the six months ended June 30, 2025[209] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - Exhibits include organizational documents, an Offer Letter, CEO and CFO certifications, and various Inline XBRL documents[211][214] SIGNATURES Report Signatures The report is certified by the Chief Executive Officer and Chief Financial Officer - The report was signed on August 5, 2025, by the Chief Executive Officer and Chief Financial Officer[216][218]