Shoals Technologies (SHLS) - 2022 Q4 - Annual Report

Part I Business Shoals Technologies Group, Inc. is a leading U.S. provider of EBOS solutions for solar, battery storage, and EV charging applications Overview - The company is a leading provider of electrical balance of system (EBOS) solutions for solar, battery storage, and electric vehicle (EV) charging applications[16] FY2022 Key Business Metrics | Metric | Value | Source | | :--- | :--- | :--- | | Revenue from System Solutions | 77.8% of total revenue | For year ended Dec 31, 2022 | | Backlog & Awarded Orders | $428.6 million | As of Dec 31, 2022 | | - Backlog (signed orders) | $168.9 million | As of Dec 31, 2022 | | - Awarded Orders (contract pending) | $259.7 million | As of Dec 31, 2022 | | Backlog & Awarded Orders Growth (YoY) | 43% | vs. Dec 31, 2021 | - The company has expanded into the EV charging market, introducing four new product families in late 2021 and scaling production through 2022[20] Our Proprietary EBOS System - The company invented a proprietary "combine-as-you-go" wiring architecture as an alternative to traditional "homerun" systems[24] - Key advantages of the "combine-as-you-go" system include: - Above-ground installation, eliminating costly trenching - Installation by general labor instead of licensed electricians - Significant reduction in wire runs (up to 95%) and connection points (over 80%) - Elimination of combiner boxes - Greater reliability and lower maintenance costs[25] Products and Services - The company offers complete EBOS "system solutions" for both traditional homerun and its proprietary combine-as-you-go architectures[27][28] - New eMobility solutions for the EV charging market include power centers, quick connect solutions for chargers, BLA technology for EV applications, and a protective raceway system[31] - Individual components sold include combiners, connectors, fuses, disconnects, and junction boxes, with component sales constituting 22.2% of revenue in FY2022[33][34][35][36] Customers and Competition - Products are sold principally to engineering, procurement, and construction (EPC) firms that build solar energy projects[41] Customer Concentration (FY2022) | Customer Group | % of Total Revenue | | :--- | :--- | | Largest Customer | 8.4% | | Five Largest Customers | 35.8% | - Principal competitors include SolarBOS Inc., Bentek Corporation, Voltage, LLC, and Hikam America, Inc[43] Manufacturing, R&D, and Intellectual Property - The company utilizes a proprietary manufacturing process involving resistance welding and a two-layer "undermold/overmold" seal, which it believes is unique in the industry, with facilities in Tennessee, Alabama, and California[45][46] - The company focuses R&D on developing innovative products to reduce cost and improve reliability, commercializing most new EBOS products and methods in the U.S. solar industry over the past five years[48] Intellectual Property Portfolio (as of Dec 31, 2022) | IP Type | U.S. | Non-U.S. | | :--- | :--- | :--- | | Issued Patents | 19 | 16 | | Pending Patent Applications | 28 | N/A | | Trademark Registrations | 26 | N/A | | Pending Trademark Applications | 5 | N/A | - The average remaining life of the company's issued U.S. patents is approximately 12.0 years[51] Human Capital - As of December 31, 2022, the company had approximately 835 full-time and temporary employees, the vast majority located in the United States[57] Full-Time Employee Diversity Metrics (mid-October 2022) | Metric | Percentage | | :--- | :--- | | Self-identified as ethnically diverse | 45% | | Self-identified as female | 39% | | Women in manager population | 28% | - None of the company's employees are represented by a labor union, and relations are considered to be good[59] Risk Factors The company faces significant risks from solar market dependency, macroeconomic pressures, supply chain disruptions, and regulatory changes Risks Related to Our Business and Our Industry - Business success is highly dependent on the continued growth in demand for solar energy projects, which can be cyclical and is influenced by factors like government subsidies and the cost of traditional energy sources[80][84] - Macroeconomic events, including heightened inflation, rising interest rates, and potential recession, could negatively affect demand and increase operating and interest costs[85][86] - A significant portion of operations is concentrated in Tennessee manufacturing facilities, making the business vulnerable to damage or disruption at these locations[95] - The business depends on a limited number of vendors, exposing it to risks of delays, disruptions, or quality control problems from vendor concentration[106] - Defects or performance problems in mission-critical products could lead to loss of customers, reputational damage, and significant warranty, indemnity, or product liability claims[118] Risks Related to Regulatory Matters - Changes to electric utility industry policies and regulations, such as renewable portfolio standards (RPS) and net metering, could present barriers to the purchase of solar energy systems and reduce demand[138][139][140] - Changes in the U.S. trade environment, including the imposition of tariffs (e.g., Section 201, Section 301), antidumping duties, and regulations like the Uyghur Forced Labor Prevention Act (UFLPA), could adversely affect the cost and availability of solar components, impacting project viability and demand for the company's products[144][147][148] Risks Related to Our Organizational Structure and Class A Common Stock - The company is a holding company with its principal asset being its interest in Shoals Parent LLC, making it dependent on distributions from Shoals Parent to fund its operations and pay taxes[151] - Future sales of Class A common stock by existing stockholders, or the perception of such sales, could cause the market price to decline[155] - The company does not intend to pay cash dividends on its Class A common stock in the foreseeable future, retaining earnings for business operations[163] Properties The company owns and leases various facilities for office, manufacturing, warehousing, and shipping, primarily in Tennessee, Alabama, and California Material Facilities as of December 31, 2022 | Location | Status | Square Feet | Uses | | :--- | :--- | :--- | :--- | | 1400 Shoals Way, Portland, TN | Owned | 103,200 | Office, manufacturing, warehousing and shipping | | 1035 Fred White Blvd., Portland, TN | Owned | 75,360 | Office, manufacturing, warehousing and shipping | | 109 Kirby Drive, Portland, TN | Leased | 219,767 | Office, manufacturing, warehousing and shipping | | 215 Industrial Drive, Muscle Shoals, AL | Owned | 16,910 | Office, manufacturing, warehousing and shipping | | 13370 Kirkham Way, Poway, CA | Leased | 21,761 | Office, manufacturing, warehousing and shipping | | 13651 Danielson Street, Poway, CA | Leased | 15,411 | Office, manufacturing, warehousing and shipping | Legal Proceedings The company is not currently involved in any legal claims or proceedings expected to materially affect its business or financial condition - Currently, there are no claims or proceedings against the company that are believed to have a material adverse effect on the business[173] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on NASDAQ, with no current dividend plans, and saw significant Class B to Class A share exchanges - Class A common stock is traded on the NASDAQ Global Market under the symbol "SHLS"[176] - The company does not currently expect to pay any cash dividends and intends to retain all available funds for business operations[178] - During the quarter ended December 31, 2022, certain Continuing Equity Owners exchanged 22,396,301 LLC Units and an equal number of Class B shares for 22,396,301 newly-issued shares of Class A common stock[182] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 revenue grew 53% to $326.9 million, with net income surging to $143.0 million primarily due to a significant gain from TRA termination Results of Operations Consolidated Results of Operations (in thousands) | | Year Ended Dec 31, 2022 (in thousands) | Year Ended Dec 31, 2021 (in thousands) | $ variance (in thousands) | % variance | | :--- | :--- | :--- | :--- | :--- | | Revenue | $326,940 | $213,212 | $113,728 | 53% | | Cost of revenue | $195,629 | $130,567 | $65,062 | 50% | | Gross profit | $131,311 | $82,645 | $48,666 | 59% | | Total operating expenses | $64,981 | $46,413 | $18,568 | 40% | | Income from operations | $66,330 | $36,232 | $30,098 | 83% | | Gain on termination of tax receivable agreement | $110,883 | $— | $110,883 | 100% | | Net income | $143,013 | $3,944 | $139,069 | 3,526% | | Net income attributable to Shoals Technologies Group, Inc. | $127,611 | $2,348 | $125,263 | 5,335% | - Revenue increased by 53% in 2022, driven by higher sales volumes from increased demand for solar EBOS generally and the company's combine-as-you-go system solutions specifically[217] - Gross profit as a percentage of revenue increased from 38.8% in 2021 to 40.2% in 2022, attributed to a higher proportion of sales from higher-margin combine-as-you-go systems and increased leverage on fixed costs[218] - A gain of $110.9 million was recognized in 2022 from the termination of the Tax Receivable Agreement (TRA), significantly boosting net income[224] Non-GAAP Financial Measures Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net income | $143,013 | $3,944 | | Adjustments | ($50,024) | $58,913 | | Adjusted EBITDA | $92,989 | $62,857 | Reconciliation of Net Income to Adjusted Net Income (in thousands) | | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net income attributable to Shoals | $127,611 | $2,348 | | Adjustments | ($65,208) | $33,566 | | Adjusted Net Income | $62,403 | $35,914 | Adjusted Diluted EPS | | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted Net Income (in thousands) | $62,403 | $35,914 | | Adjusted diluted weighted average shares (in thousands) | 167,631 | 166,936 | | Adjusted Diluted EPS ($) | $0.37 | $0.22 | Liquidity and Capital Resources Summary of Cash Flows (in thousands) | Cash Flow Activity | Year Ended Dec 31, 2022 (in thousands) | Year Ended Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $39,455 | $(4,083) | | Net cash used in investing activities | $(3,657) | $(17,035) | | Net cash provided by (used in) financing activities | $(36,589) | $20,602 | - As of December 31, 2022, the company had $8.8 million in cash and cash equivalents, $243.3 million in outstanding borrowings, and $102.0 million available under its $150.0 million Revolving Credit Facility[239] - Cash from operations was $39.5 million, primarily driven by net income adjusted for non-cash items, offset by increases in inventory ($36.9 million) and accounts receivable ($22.4 million)[240] - Cash used in financing activities was $36.6 million, primarily due to a $58.0 million payment to terminate the TRA, offset by $42.9 million in net proceeds from a follow-on stock offering[242] Quantitative and Qualitative Disclosures About Market Risk Primary market risks include customer concentration, commodity price volatility, and interest rate fluctuations on variable-rate debt - The company has significant customer concentration risk, with the largest customer accounting for 8.4% of revenue and the top five customers for 35.8% in FY2022[258] - The business is subject to commodity price risk from fluctuating market prices of raw materials like copper, aluminum, and steel, and does not currently use hedging arrangements[259] - The company has interest rate risk on its $243.3 million of variable-rate long-term debt, where a 100 basis point increase in interest rates would impact annual interest expense by approximately $2.4 million[260] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management, including the CEO and CFO, concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[264] - Management assessed the effectiveness of internal control over financial reporting and concluded that it was effective as of December 31, 2022, based on the COSO framework (2013)[266] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Related Party Transactions Information for Items 10-14, including governance, compensation, and related party transactions, is incorporated by reference from the definitive proxy statement - The information required for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement to be filed with the SEC[273][274][275][276][277] Part IV Exhibits and Financial Statement Schedules This section includes required financial statements starting on page F-1 and an index of all exhibits filed with the Form 10-K - The financial statements and supplementary data required by this item are included in the Annual Report on Form 10-K beginning on page F-1[279] Financial Statements and Notes to Consolidated Financial Statements The audited consolidated financial statements present the company's financial position and results, detailing key events like the TRA termination gain Consolidated Financial Statements Consolidated financial statements show significant growth in assets and revenue, with net income surging due to a one-time gain Consolidated Balance Sheets (in thousands) | | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $153,540 | $93,448 | | Total Assets | $594,895 | $426,414 | | Total Current Liabilities | $52,622 | $31,554 | | Long-term debt, less current portion | $189,063 | $189,913 | | Payable pursuant to the tax receivable agreement | $— | $156,374 | | Total Liabilities | $293,906 | $433,912 | | Total stockholders' equity (deficit) | $300,989 | $(7,498) | Consolidated Statements of Operations (in thousands) | | Year Ended Dec 31, 2022 (in thousands) | Year Ended Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Revenue | $326,940 | $213,212 | | Gross profit | $131,311 | $82,645 | | Income from operations | $66,330 | $36,232 | | Gain on termination of tax receivable agreement | $110,883 | $— | | Net income | $143,013 | $3,944 | | Net income attributable to Shoals Technologies Group, Inc. | $127,611 | $2,348 | Note 9. Long-Term Debt As of December 31, 2022, total debt was $243.3 million, including a Term Loan and upsized Revolving Credit Facility Long-Term Debt Outstanding (in thousands) | Facility | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Term Loan Facility | $195,250 | $197,250 | | Revolving Credit Facility | $48,000 | $55,140 | | Total Principal | $243,250 | $252,390 | - In May 2022, the company amended its Senior Secured Credit Agreement to increase the Revolving Credit Facility from $100.0 million to $150.0 million[427] - As of December 31, 2022, the interest rate on the Term Loan Facility was 7.51% and the rate on the Revolving Credit Facility ranged from 7.00% to 7.92%[432] Note 10. Earnings per Share (EPS) For FY2022, basic EPS was $1.11 and diluted EPS was $0.85, reflecting potential dilution from Class B stock and stock units Earnings Per Share Calculation (FY2022) | Metric | Value | | :--- | :--- | | Net income attributable to Shoals (basic) | $127,611 thousand | | Weighted average shares (basic) | 114,495 thousand | | Basic EPS ($) | $1.11 | | Net income attributable to Shoals (diluted) | $143,013 thousand | | Weighted average shares (diluted) | 167,631 thousand | | Diluted EPS ($) | $0.85 | Note 17. Payable Pursuant to the Tax Receivable Agreement The company amended and terminated its Tax Receivable Agreement (TRA) in December 2022 for a $58.0 million payment, recognizing a $110.9 million gain - On November 29, 2022, the company entered into an amendment to its TRA, granting it the right to terminate the agreement for a cash payment of $58.0 million[505] - The company exercised its termination right on December 6, 2022, resulting in a remeasurement of the TRA liability to $58.0 million and the recognition of a $110.9 million gain on termination, which was recorded in the statement of operations[505] Note 18. Revenue Recognition Revenue is disaggregated by system solutions (77.8% in 2022) and components (22.2%), primarily recognized over time based on units manufactured Revenue by Product Type (in thousands) | Product Type | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | :--- | | System solutions | $254,415 | $155,818 | $116,720 | | Components | $72,525 | $57,394 | $58,798 | | Total revenue | $326,940 | $213,212 | $175,518 | - The company primarily recognizes revenue over time using the output method based on units manufactured, as this best depicts the continuous transfer of control to the customer for products that do not have an alternative use[367] Note 20. Subsequent Events Subsequent to year-end, the company entered a separation agreement with its CEO, effective March 15, 2023, accelerating unvested equity awards - On February 24, 2023, the company entered into a separation agreement with its CEO, effective March 15, 2023, due to his termination for disability for health reasons[516] - The separation will result in the acceleration of unvested RSUs and a prorated portion of unvested PSUs, leading to an estimated equity-based compensation expense of $4.0 million to be recognized in Q1 2023[516]