Shoals Technologies (SHLS) - 2021 Q4 - Annual Report

Part I Business Shoals is a leading U.S. provider of solar EBOS and EV charging solutions, selling proprietary "combine-as-you-go" systems to EPC firms - Shoals is a leading provider of Electrical Balance of System (EBOS) solutions for solar energy projects in the United States, critical components for carrying electric current from solar panels to the power grid[20] - The company has recently expanded its product offerings to include EV Charging solutions, such as power centers, quick connect bases, and Big Lead Assembly (BLA) technology adapted for the EV market[20][25] FY2021 Business Highlights | Metric | Value | Source | | :--- | :--- | :--- | | Revenue from System Solutions | ~73% of total revenue | For the year ended Dec 31, 2021 | | Backlog and Awarded Orders | $299.0 million | As of Dec 31, 2021 | | YoY Growth in Backlog/Awarded Orders | 94% | Compared to Dec 31, 2020 | | QoQ Growth in Backlog/Awarded Orders | 10% | Compared to Sep 30, 2021 | - Shoals' proprietary "combine-as-you-go" system architecture is a key differentiator, offering advantages over traditional "homerun" systems by reducing wire runs, eliminating combiner boxes, and allowing for installation by general labor, which lowers overall costs[31][32][34] - The company's primary customers are Engineering, Procurement, and Construction (EPC) firms. For the year ended December 31, 2021, the three largest customers accounted for approximately 40% of total revenue[22][47][48] - As of January 31, 2022, the company's intellectual property portfolio included 19 issued U.S. patents, 12 pending U.S. patent applications, and 25 U.S. trademark registrations, with patents expiring between 2031 and 2037[56] Risk Factors The company faces risks from solar market dependency, regulatory changes, supply chain disruptions, and its organizational structure - Business & Industry Risks: The company's success is highly dependent on the continued growth of the solar energy market. A slowdown in demand for solar projects would directly harm the business[76][77] - Regulatory Risks: Changes in electric utility policies, government regulations (like PURPA), and the reduction or elimination of renewable energy incentives could reduce demand for solar energy systems and the company's products[78][79][117] - Supply Chain & Manufacturing Risks: The company relies on a limited number of vendors and is exposed to disruptions from international suppliers, which could be impacted by trade restrictions, tariffs (e.g., on steel, aluminum, and solar modules), and health epidemics like COVID-19[97][98][100] - Customer Concentration Risk: A small number of customers account for a material portion of revenue. In FY2021, the top three customers represented approximately 40% of revenue, making the company vulnerable to the loss of a significant customer[116] - Product & Liability Risks: Defects or performance issues with mission-critical EBOS components could lead to significant warranty claims, product liability, reputational damage, and decreased revenue[126][127][129] - Organizational Structure Risks: The company is a holding company dependent on distributions from its subsidiary, Shoals Parent. It has significant payment obligations under a Tax Receivable Agreement, estimated at $156.4 million as of December 31, 2021, which are not conditional on continued ownership by beneficiaries[159][160][161] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[215] Properties The company owns and leases facilities in Tennessee, Alabama, and California for operations, deemed sufficient for future needs Material Facilities as of December 31, 2021 | 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 | | 5599 Highway 31, Portland, TN | Leased | 60,000 | Warehousing and shipping | | 109 Kirby Drive, Portland, TN | Leased | 219,767 | 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 | Warehousing | Legal Proceedings No legal claims or proceedings are expected to materially adversely affect the company's business or financial condition - There are currently no claims or proceedings against the company that are expected to have a material adverse effect on the business[217] Mine Safety Disclosures This section is not applicable to the company - Not applicable[218] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A common stock trades on NASDAQ (SHLS) since January 2021 IPO; no cash dividends are expected - The company's Class A common stock is traded on the NASDAQ Global Market under the symbol "SHLS". The IPO was closed on January 29, 2021, at a price of $25.00 per share[220] - The company currently intends to retain all available funds and future earnings for business operations and does not expect to pay cash dividends in the foreseeable future[222] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2021 financial performance, noting revenue growth, net income decline due to debt costs, and negative operating cash flow Results of Operations 2021 revenue grew 21% to $213.2 million, but net income sharply declined 88% to $3.9 million due to debt-related expenses Consolidated Results of Operations (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue | $213,212 | $175,518 | $144,496 | | Gross profit | $82,645 | $66,546 | $44,212 | | Income from Operations | $36,232 | $37,276 | $26,930 | | Net income | $3,944 | $33,766 | $25,143 | | Net income attributable to Shoals | $2,348 | $33,766 | $25,143 | - Revenue (2021 vs 2020): Increased by $37.7 million (21%) due to higher sales volumes from increased demand for solar EBOS and the company's combine-as-you-go systems[264] - Gross Profit (2021 vs 2020): Gross margin increased to 38.8% from 37.9%, attributed to purchasing efficiencies and a favorable product mix with higher sales of combine-as-you-go systems[265][266] - Operating Expenses (2021 vs 2020): General and administrative expenses rose by $16.9 million (80%), primarily due to increased headcount, professional fees for being a public company, higher insurance costs, and acquisition-related expenses[267] - Net Income (2021 vs 2020): Decreased by $29.8 million (88%), largely due to a $16.0 million loss on debt repayment and a $11.0 million increase in interest expense following a new credit agreement[263][269][271] Non-GAAP Financial Measures Non-GAAP measures, Adjusted EBITDA and Adjusted Net Income, provide insight into core operational performance, showing mixed trends in 2021 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net income | $3,944 | $33,766 | $25,143 | | Interest expense, net | $14,549 | $3,510 | $1,787 | | Depreciation & Amortization | $10,053 | $9,405 | $9,163 | | Loss on debt repayment | $15,990 | — | — | | Equity-based compensation | $11,286 | $8,251 | — | | Adjusted EBITDA | $62,857 | $60,899 | $36,779 | Reconciliation to Adjusted Net Income (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net income attributable to Shoals | $2,348 | $33,766 | $25,143 | | Key Adjustments (net of tax) | $33,566 | $12,123 | $1,443 | | Adjusted Net Income | $35,914 | $45,889 | $26,586 | - For 2021, Adjusted Diluted EPS was $0.22 per share[287] Liquidity and Capital Resources 2021 saw negative operating cash flow of $4.1 million due to inventory and receivables, with $5.0 million cash and $44.9 million credit available Summary of Cash Flows (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $(4,083) | $54,082 | $36,182 | | Net cash used in investing activities | $(17,035) | $(3,236) | $(1,719) | | Net cash from (used in) financing activities | $20,602 | $(47,855) | $(27,489) | - Cash used in operating activities in 2021 was driven by a $17.2 million increase in inventory and an $8.9 million increase in receivables, reflecting investments to support growth and timing of billings[291] - As of December 31, 2021, the company had $5.0 million in cash and cash equivalents and $252.4 million in outstanding borrowings, with $44.9 million available under its revolving credit facility[289] Critical Accounting Policies and Significant Management Estimates Critical accounting policies involve significant estimates for revenue recognition, equity compensation, inventory, income taxes, and TRA liability - Revenue Recognition: Revenue is recognized over time using the output method based on units manufactured, as this is believed to best depict the continuous transfer of control to the customer[305] - Payable Pursuant to the Tax Receivable Agreement (TRA): A liability of $156.4 million was recognized as of Dec 31, 2021. This is contingent on generating sufficient future taxable income to utilize related tax benefits, requiring significant judgment and estimation[314] - Income Taxes: The company must assess the realizability of its deferred tax assets ($177.0 million as of Dec 31, 2021), which requires projecting future taxable income[311] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from customer concentration, unhedged commodity price fluctuations, and variable interest rate debt - Customer Concentration: For the year ended December 31, 2021, the largest customer accounted for 18% of revenue, and the five largest customers accounted for 52% of revenue[317] - Commodity Price Risk: The company is subject to risk from fluctuating market prices of raw materials, particularly copper, and does not use hedging arrangements to mitigate this risk[319] - Interest Rate Risk: As of December 31, 2021, the company had $247.1 million in variable interest rate debt. A 100 basis point (1%) increase in interest rates would increase annual interest expense by approximately $2.5 million[320] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and notes for 2019-2021, including the auditor's report - The financial statements required by this item are included in the Annual Report on Form 10-K beginning on page F-1[321] - The independent registered public accounting firm, BDO USA, LLP, has audited the consolidated financial statements and provided an opinion that they present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[352] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting or financial disclosure - None reported[322] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[324] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[326] Other Information This section is not applicable - Not applicable[328] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - Information is incorporated by reference from the company's definitive proxy statement[331] Executive Compensation Information on executive compensation is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[332] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the proxy statement - Information is incorporated by reference from the company's definitive proxy statement[333] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the proxy statement - Information is incorporated by reference from the company's definitive proxy statement[334] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[335] Part IV Exhibits and Financial Statement Schedules Financial statements are on page F-1; schedules are omitted as information is provided elsewhere; an exhibit index is included - The financial statements and supplementary data are included after the Signature page, beginning on page F-1[337] - All financial statement schedules have been omitted because they are not required or the necessary information is included elsewhere in the financial statements or notes[338] Form 10–K Summary The company has elected not to provide a summary of the Form 10-K - None provided[345]