Shimmick Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 29, 2023, not 2022 Q3. Comparisons below are with the corresponding 2022 periods. Financial amounts are in millions unless stated otherwise.
Business context and reporting period
Shimmick is an infrastructure contractor focused on water treatment, water resources and other critical infrastructure. It was formerly part of AECOM and has operated independently since January 2021. The filing reports unaudited results for the three and nine months ended September 29, 2023.
Backlog was $1.159 billion, including more than half in water projects; remaining performance obligations were $1.2 billion with a weighted-average life of 2.0 years. Management cautions that backlog includes estimates and contracts are generally cancellable or modifiable by customers.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $175.4 | $184.4 | $494.7 | $477.9 |
| Gross margin | $17.0 (9.7%) | $13.1 (7.1%) | $22.8 (4.6%) | $18.5 (3.9%) |
| Net income | $34.8 | $17.9 | $15.2 | $21.0 |
| Net income attributable to Shimmick | $34.6 | $18.0 | $14.9 | $21.7 |
| Basic and diluted EPS | $1.58 | $0.82 | $0.68 | $0.99 |
At September 29, 2023, cash and cash equivalents were $61.9 and restricted cash was $1.3, versus $77.8 and $4.3, respectively, at December 30, 2022. Current assets were $270.7 and current liabilities $297.2 (current ratio about 0.91). Long-term debt, net, was $33.4, compared with no debt at year-end 2022. Stockholders’ equity was $68.4.
For the first nine months, operating cash flow was negative $64.8, compared with negative $5.2 in 2022. Investing cash flow was positive $13.2 and financing cash flow positive $32.7. Cash, cash equivalents and restricted cash declined $18.9 to $63.2. The operating cash outflow principally reflected working-capital movements, including decreases in contract liabilities and accrued expenses. Capital expenditures were $6.1.
Material changes versus comparable periods
- Q3 revenue fell 5%, while gross margin rose 29%; management attributed the margin improvement partly to its shift toward higher-margin, lower-risk projects and timing of work.
- Q3 net income included a $30.1 gain from selling non-core business contracts. Equity earnings from unconsolidated joint ventures fell $17.0, largely because a prior-year rail-project claim settlement did not recur.
- Nine-month revenue grew 4%, reflecting growth in post-AECOM-sale projects partly offset by legacy projects winding down. Nine-month net income fell 28%, mainly because joint-venture equity earnings were $48.8 lower; the $31.7 gain on asset sales partly offset the decline.
- Legacy loss jobs generated $72 million of revenue in the first nine months of 2023; the filing says no further gross margin is expected on these jobs as they finish.
Outlook, risks and unusual items
- Management stated that operating, investing and financing cash flows were expected to be sufficient for at least the next 12 months, while warning that cash needs, growth, public-company costs and access to capital could affect liquidity. No specific revenue or earnings guidance was provided.
- The $35 million contract sale closed in Q3 after a $5 million purchase-price adjustment; the company received $30 million in cash and recognized a $30.1 million gain.
- After quarter-end, the company completed its IPO on November 16, 2023, selling 3.575 million shares at $7.00 per share. The filing gives approximately $19 million of net proceeds after underwriting discounts and offering expenses in several sections. It says proceeds and cash on hand were used to repay facility borrowings, followed by a $20 million draw for working capital.
- The $35 million revolving credit facility bears interest at adjusted term SOFR, subject to a 1% floor, plus 4.50%; it has a $25 million minimum-liquidity covenant and a 1.75-to-1.0 maximum leverage ratio. The company reported no known covenant noncompliance as of December 19, 2023.
- Contract estimate revisions reduced nine-month 2023 gross margin by a net $10 million, primarily due to higher estimated completion costs and a settlement below prior estimates, partly offset by an outstanding claim.
- Key risks include fixed-price contract cost overruns, uncertain claims and change-order recoveries, customer concentration, labor and subcontractor availability, bonding access, seasonality, and joint-venture performance guarantees. The maximum potential payments under JV guarantees could not be estimated. Three customers represented 27.9%, 18.2% and 17.6% of accounts receivable at quarter-end.
- Disclosure controls were deemed ineffective due to material weaknesses involving staffing, financial reporting controls and COSO control principles. Remediation controls had been implemented, but management said they had not operated long enough to conclude they were effective. Management performed additional procedures and stated the statements fairly present the results.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is Q3 2023, despite the request metadata indicating 2022 Q3.
- Reconcile the IPO proceeds disclosures: the filing reports approximately $19 million net proceeds in multiple places but also cites approximately $23 million before estimated offering expenses.
- Verify post-IPO facility repayment and subsequent $20 million working-capital draw against later filings, including ending debt and covenant headroom.
- Track operating cash flow and contract working capital, especially contract assets, contract liabilities and accrued expenses.
- Assess whether gross-margin improvement persists without the one-time asset-sale gain and as legacy loss jobs wind down; monitor claim recoveries and cost-to-complete estimates.
- Review progress in remediating the disclosed material weaknesses and any subsequent conclusions on control effectiveness.