Shoals Technologies Group, Inc.

across our focus markets through 2026 in addition our relationships with large global developers with ties to the u.s export import bank are opening doors and growing our pipeline and developing markets outside our targets of australia latin america and europe our community commercial and industrial or ccni business is performing well we are engaged with large well-respected electrical distributors that are driving meaningful quote volume increases. While this market remains small as compared to our core utility scale opportunity, it is one that provides us a path to create lasting relationships and future growth with new customers. Our OEM business is tracking ahead of expectations as our partner continues to see strong demand for their panels. Our deep engineering and manufacturing relationship with the largest domestic module provider is a strategic advantage for Shoals and one we're committed to maintain and expand. The opportunity we've received the most questions about this year is our battery energy storage solutions or BESS offering. So I'd like to provide a little bit more detail today. Last year, we introduced a BESS solution targeting the solar plus storage market. specifically when new solar plants are built with attached storage systems. That opportunity remains exciting for us today since it builds upon our relationships with existing customers and developers. In addition to that opportunity, there are also two additional use cases that we are now pursuing, grid firming and data centers. Let's start with grid firming solutions. Utilities are very interested in providing more reliable and consistent power to their customers. One method is to add grid-scale battery storage solutions to their existing grids in order to provide real-time balance between supply and demand. Shoal's product offerings can play a part in providing solutions to system integrators in this area, and we are actively quoting opportunities in this space. In addition to grid firming, there are emerging use cases with data centers. Once again, consistent and dependable energy is critical to operations. Battery storage solutions can provide uninterrupted power, as well as to help regulate power demand spikes and troughs created by artificial intelligence processing. This is an area that has significant market potential in the coming years, and we are actively engaged with system integrators in this market as well. This is an exciting time in a relatively young market, but one we are investing heavily in. I'm pleased to share with you today that we have already signed two MSAs to deliver products in these emerging best markets and are in conversation with several others about providing Schultz systems and their unique solutions. At the end of Q3, we had approximately $18 million of bests in our backlog and awarded orders. In summary, our domestic utility scale market is healthy and growing. We are executing our strategic framework of market diversification as anticipated, and we are leveraging our expertise, engineering, and manufacturing capabilities to pursue new opportunities with speed and purpose. It is an exciting time to be at Shoals. With that, I'll now turn it over to Dominic, who will discuss our third quarter financial results in more detail and our outlook for the fourth quarter. Dominic?

Thanks, Brandon, and greetings to everyone on the call. Turning to our third quarter financial results, Revenue increased by 32.9% year-over-year to $135.8 million. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of international, CCNI, and OEM contributed to year-over-year revenue growth in the quarter. Gross profit increased to $50.3 million compared to $25.4 million in the prior year period. Our GAAP gross profit percentage was 37.0% compared to 24.8% in the prior year period within our expected percentage range of mid to upper 30s. There are a few dynamics worth mentioning with regards to gross profit percentage. First, I'd like to discuss product mix. Certain eBoss solutions drive more value for customers than others. As such, those custom and engineered solutions typically carry higher margins than other product lines. Some new products, such as Long Tail BLA, drive incremental revenue in our share wallet, but do not carry the same gross profit percentage as our traditional BLA solution. Long Tail BLA does, however, provide incremental gross profit dollars and has allowed us to capture additional share while meeting customer needs. Second, I'd like to provide some color regarding tariffs. Our supply chain team is constantly working to drive material costs out of our products. Months of work to test new raw materials, negotiate terms, and onboard new suppliers can be undone in a moment as trade policies change without notice. Unfortunately, like many others, Shoals has been impacted by these policy shifts this year, and as a result, some margin-enhancing savings could not be realized as expected. Moving on to general and administrative expenses. G&A was $29.4 million, which is $10.7 million higher than the prior year period. Our legal expenses, which accounted for approximately $5.7 million of the increase, remain elevated while we make our way through ongoing litigation matters. Approximately $6.8 million of legal expense was specifically related to the ongoing wire insulation shrinkback litigation. Income from operations or operating profit was $18.7 million compared to $4.5 million during the prior year period. Operating profit margin was 13.7% compared to 4.4% a year ago. Net income was $11.9 million compared to a net loss of $300,000 during the prior year period. Adjusted net income was $21.0 million compared to $13.9 million in the prior year period. Adjusted EBITDA was $32.0 million compared to $24.5 million in the prior year period, representing 30% growth. Adjusted EBITDA margin was 23.5% compared to 24.0% a year ago, driven primarily by lower gross margin flow through. Adjusted diluted earnings per share of 12 cents was approximately 50% higher than the prior year period. During the third quarter, we spent $11.9 million on wire insulation shrink-back remediation and had a remaining warranty liability on our balance sheet of $7.2 million as of September 30th. The current portion of the remaining liability related to shrink-back is now $4.2 million. Operationally, we generated $19.4 million of cash in the third quarter, driven by higher net income, an increase in accounts payable, and higher accrued expenses. These increases were partially offset by a higher accounts receivable balance driven by strong sales volumes and increased spend on warranty remediation. On a year-to-date basis, we have generated $21.2 million in operating cash flow. Free cash flow was $9.0 million in the third quarter, reflecting both the $11.9 million impact of remediation costs and elevated capital expenditures related to our new facility. These two items impacted free cash flow by a total of $22.4 million in the quarter. We received our certificate of occupancy for our new facility in Portland, Tennessee, and we began moving into the new facility in September. We expect to begin consolidating operations from our three existing facilities in the fourth quarter and expect to complete the entire consolidation by mid-2026. Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $8.6 million and net debt to adjusted EBITDA of 1.2 times. Our net debt was $118.2 million, a slight decrease over the prior quarter. We paid an additional $5.0 million down on our revolver during the period, which had an outstanding balance of $126.8 million at the end of the quarter. With regards to capital allocation, given a number of competing priorities for our cash this year, including shrink-back remediation and factory consolidation, we did not purchase any shares in the third quarter under our share repurchase program. Backlog and awarded orders ended the third quarter at a record $721 million, a sequential increase of $50 million. Backlog constitutes $298 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming periods can be achieved. As of September 30th, $575 million of our backlog and awarded orders have planned delivery dates in the coming four quarters, with the remaining $146 million beyond that. Turning now to the outlook. Quarterly pacing within the year has continued to follow the strong back half we've been communicating since February. For the quarter ending December 31st, 2025, the company expects revenue now to be in the range of $140 to $150 million, representing 36% year-over-year growth at the midpoint, and adjusted EBITDA to be in the range of $35 to $40 million. This will result in full year 2025 revenue between $467 to $477 million, and adjusted EBITDA in the range of $105 to $110 million. In addition, for the full year, we expect cash flow from operations to remain in the range of $15 to $25 million, capital expenditures to remain in the range of $30 to $40 million, and interest expense to remain in the range of $8 to $12 million. With that, I'll turn it back over to Brandon for closing remarks.

Thank you, Dominic. The demand environment over the last few years has been volatile, driven not only by the macroeconomic and political backdrop, but also labor availability, supply chain disruptions, and permitting. That said, 2025 appears to be playing out slightly better than we had anticipated when we provided guidance in February. The changes we've implemented, which span both commercial and operational process improvements and shifts in strategic correction and focus, are enabling exciting and visible improvements across the company. The transformation from a company with a narrow customer mix product offering, and geographic footprint to a diversified, multinational energy solutions provider is beginning to take shape. These changes do not occur overnight, but through the deployment of repeatable processes that improve productivity, visibility, and scale. Through the hiring of seasoned business leaders who can execute with consistency, through the focus on developing new, innovative product solutions for customers facing real-world problems, and through an unyielding focus on improving the customer experience from start to finish. We are building the next version of Shoals, one that will deliver attractive returns for our shareholders through profitable growth and strong cash flow generation. I'm very encouraged about the progress we've made and how well we're set to continue the journey in 2026 and beyond. We want to thank our shareholders and customers for their continued trust in our employees for their hard work and dedication. Operator, we are now ready for questions.

Perfect. Thank you. If you'd like to ask a question on today's call, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by one on your keypad now. Our first question comes from Christine Cho of Barclays. Christine, your line is open. Please go ahead.

Good morning. Thank you for taking my question. I just wanted to start with maybe the – good morning. I just wanted to start with the data center opportunity. Brandon, I think in your prepared remarks, you talk about conversations with system integrators. Is that how you expect the data center opportunity to materialize through integrators? And if that's the case, you know, how should we expect the opportunity will show up in your bookings? Should we think something like this 18 million that you guys talked about this quarter, like more consistently every quarter? Or could we see, you know, a lumpy large booking? Also, if you could provide some more information on the MSAs, maybe size, type of counterparty, how we should expect orders from these MSAs to make it into backlog. Thank you.

Thanks, Christine. Good morning. As you mentioned, we are excited about the two new MSAs. We're excited about the $18 million of backlog and awarded orders. You know, specifically, Our channel to market, you know, the question around system integrators, you know, we could be partnering with system integrators directly. We could be partnering with EPCs directly on the projects. And we've talked about, you know, in the past quarters, even a sale to a hyperscaler. So, you know, it's a new market and how we partner for a particular project you know, may change from project to project. You know, I think the important thing for us is that we are engaged in some way, shape, or form with these projects and are helping customers engineer solutions. You know, many of these solutions at data centers, and I know you asked specifically about who the MSAs are with and the size is, you know, Yes, one, the data centers, typically there's a level of confidentiality about where they are and who they are. And specifically with our MSAs, our partners may be deploying some proprietary system architecture. So we're limited about what we can share for those specific opportunities. As we've talked about in the past, this business for us, because the the newness of it and, and even the size and scale of some of these projects are backlog and awarded orders may at times be lumpy. So, you know, I wouldn't specifically count on, Hey, we, we booked $18 million and we're going to continue to book that quarter after quarter. We can have some lumpy bookings that, that said, As we begin recognizing revenue on this, the revenue should be somewhat stable as customers take deliveries. On these specific opportunities in our backlog and awarded orders, I would anticipate revenue beginning to materialize in the beginning of second quarter. So, yeah. You know, very young and evolving market, new product set for us. We're very excited about it. And as we've commented in the past, you know, we're dedicating about 15% of our floor space, our operating floor space here in our new facility to our best product offering. And that build out is underway. So things are progressing as ahead of plans.

Okay, great. And then just moving on to gross margins, you know, They were soft this quarter despite system solutions being a bigger part of the business than it has been for a while. Can you just help us parse out how much of this is due to tariffs? Is it lower pricing to get back some share? You talked about the lower margin BLA. Is there a margin drag from the expansion of the new manufacturing? Just kind of help us parse it out and if you can give us some idea of how we should expect it to trend over the next year.

Sure, Christina. It's Dominic here. Yeah, so the margins have been stable this year and right within the range that we've expected. You know, the 35, you know, the mid 30s, upper 30s percent. So coming in at 37 percent was right within our expectations. In my prepared remarks, I did talk about a couple of things because the new long tail BLA, as an example, is one where the margins will fall on a percentage basis. There's a large section of that that expands our share of wallet into the solar field for the feeder cable, and that is just not the same amount of value engineering on that section of revenue. So we've talked about that, and that is part of what is going on as expected. Now, the tariff thing is also an interesting one for us, because while we're largely protected and mitigated from an increase when we're quoting jobs, we can pass those along as we do the final purchase order. There are some things that we're doing behind the scenes to drive costs out of the system. And that's what I was referring to on the prepared remarks that all the work of our supply chain team to onboard with our engineers to test the new products and to really get new raw materials ready to go. It was actually undone for us. So we did not realize the margin lift that we were expecting. It was it was still within the range where I would quite honestly hope to have a more pleasant surprise on the upside there. But we were not able to achieve that due to the tariffs that changed in the middle of that process for us. So, you know, on the tariffs alone, on that savings, we actually had forecast about a 100 to 200 basis point improvement in margins. And that was undone for us this year. So while we still have very stable margins, keep in mind that the projects that we've done thus far in 2025 were priced in 2024. They still have some of the new incentives that we provided new customers to come back to Shoals. And I do believe that our stability in the gross profit margin is fine. As I mentioned, we are shifting and have been trying to focus on cash generation, our strong cash flows and operating profit, and we will continue to do so going forward as well.

Thank you, Christine. Charlie, next question, please.

Of course, thank you. Our next question comes from Julian DeMoulin-Smith of Jefferies. Julian, your line is open. Please go ahead.

Hey, good morning, team. Thank you guys very much. I'm going to try this from a slightly different perspective. You alluded here in your prepared remarks that you're doing slightly better than planned for 2025, but I'd love to hear how you're doing against the longer-term metrics you articulated from September 24th, Analyst Day. You've got this 20% plus year-over-year increase in backlog, the $900 million quoted here in the quarter. How are you looking at the beyond-25 period at this point versus the targets and ranges that you implied at the time here?

Sure. So I'll start and ask Brandon to join in because, as he said in his prepared remarks, all of these areas are exceeding our expectations that we laid out at Analyst Day. Of the metrics that we've talked about, I certainly want to focus a little bit on the revenue growth. As we've also said, it's exceeded the expectations in the range that we laid out a year ago. And keeping in mind that a year ago, we also thought that we were victorious in our voltage case with the ITC. So as we look ahead, we're not guiding to 2026 and 27. We certainly are very encouraged at the growth in our book of business. I couldn't be more positive about our backlog and awarded orders. And on our end, I think it was a bit of a glitch when I was talking about the $298 million of backlog, which is approaching records again. So I believe that the metrics that we've laid out remain very strong. Of those, the metrics that we talked about in terms of the various strategic pillars, the best opportunity is the one that we believe has the opportunity to significantly exceed what we laid out a year ago. And so I will pause on that because Brandon was talking more about that.

Yeah. Julian, it's a great question. Let me maybe give a big picture view and then step through some of, uh, some of the growth pillars. I think holistically, uh, revenue, the revenue generation is exceeding plan and what we laid out in our investor day. Um, you know, effectively probably almost a year ahead of what we've said at investor day. So we are very excited about that. Um, you know, our core focus here has been to protect and grow our core market, return that to growth. The utility scale solar business, as Dominic mentioned, is operating at record levels, our backlog and awarded orders, you know, fantastic at $720 million. I'm really excited when we can have a record revenue quarter and have a book to bill of 1.4 times. That is a, That is fantastic execution by our commercial team. So I feel really good about our core business. As it relates to our pillars of growth and our diversification strategy, I think all are performing at or above our expected ranges. Our CC&I business, if you think about that alone, we're up 36% year over year. So that is performing at very solid, solid rates of growth. Our OEM business expanding substantially. As you guys are aware, we have a core customer in that product portfolio that is also expanding, and we are partnering and growing with them, and we're excited about that. Our international business, shipping three projects in a quarter is great for us. That probably has not happened in the existence of Shoals. We're excited about the two projects in LATAM and one in Australia. Our pipeline is very strong there, and we are building a team out to really focus on that Australia market and New Zealand. So great things to come there. As Dominic mentioned, couldn't be more excited about our battery energy storage program. The two MSAs for us in the quarter are big. as well as starting to really see some proof points in that business and those MSAs driving data center and grid scale opportunities. So we are very excited about that. You know, our team, commercial team with operations, driving a substantial amount of new product development this year. And quite honestly, that's what is, which driven some of the international growth, the three international projects that we've started shipping this past quarter all have new products, uh, as part of those, uh, those projects, which is very excited. And really finally, from an operation standpoint, uh, our consolidation is underway. Uh, we are excited. We are actually sitting in our new facility today, uh, Our SG&A team, our salaried staff, this is probably the first time in the history of the company since maybe its beginnings that we have all been in one building. And so we're excited to build that sense of community and culture within the organization from an operations, a true operations standpoint, just to commend the ops team. We started our plant consolidation in Q3. We actually moved out of one of our facilities. As we previously disclosed, we sold a building in Q2, I believe it would have been. And we moved out of that building. For perspective, our team moved 540 truckloads of material out of that facility and still met record production levels in Q3. So fantastic job by them. And obviously, a confidence boost for us as we complete this consolidation, as we can, you know, make moves in buildings and produce at record levels at the same time. So I'm excited about how the company is executing for the future.

Julian, did you have a follow-up? It's excellent to hear. Can you quantify any of these? Yeah, can you just quantify real quickly, just within the backlog edition, some of these MSAs?

It's the MSAs.

And or any of the BAS or data center wins with system integrators?

Yeah, so in our awarded orders for the quarter, we had $18 million. The vast majority of that is driven by the MSAs. I can say probably since quarter closed, we have moved a significant portion of that $18 million to to backlog and have signed purchase orders. I would think of it maybe in the range of three quarters of that $18 million. So we do have now signed purchase orders, which we're excited about. And again, we'll begin production in Q2.

And perhaps I could help just on the MSAs themselves. Unlike the MSAs where we've announced specific targets for volume, these MSAs do not give a specific target for volume. It's the partnership. It has all the terms and conditions so that we can move with haste when purchase orders are ready to go. So I don't want – there is no additional backlog in awarded orders beyond where we actually have those orders, as Brandon mentioned. So nothing else from the MSAs would impact our record VLAO.

Thank you, Julian. Charlie? Got it. Excellent, guys. Thank you.

Thank you. Of course, our next question comes from Philip Shen of Roth Capital Partners. Philip, your line is open. Please go ahead.

Hi, all. Thanks for taking the questions. Wanted to dig into the margin topic a little bit more. Can you give us a little more color on the tariffs? Were they the Section 232 inclusion uh from you know for aluminum uh on electric cabling uh that adversely impacted i think that came out in august and as a result would you expect that to be uh relieved or or would you expect to be able to pass that along because that was a very sudden kind of inclusion right of um uh electric cabling and so do you think uh that tariff can be passed along in the near term to your customers and then as a result that 100 to 200 basis points operational improvement that, Dominic, you highlighted can then be realized, you know, perhaps partially in Q4, or is it more in the first half of next year? So, I wanted to see if you could map out how that might play out.

Thanks. So, Phil, that's a great question. Section 232 aluminum tariffs obviously have impacted us and others in the marketplace. think about that specifically almost in equal parts with the country-specific tariffs. We've got a pretty diverse supply chain. And, you know, the way those tariffs are calculated for wire specifically is interesting. You know, you can sort of parse out the aluminum piece of that on 232. You can also parse out the country-specific tariffs there. So, you know, won't get into