Shimmick Corp quarterly report, Q1 FY2024

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Business context and reporting period

Shimmick Corporation is an infrastructure construction contractor focused on water and other critical infrastructure. This filing reports the unaudited quarter ended March 29, 2024—not 2023 Q1 as stated in the request—and compares results with the quarter ended March 31, 2023. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.

Financial performance and position

  • Revenue: $120.0 million, down 27% from $164.1 million. Gross margin was a loss of $15.9 million (negative 13.2% of revenue), compared with positive gross margin of $6.2 million (3.8%) a year earlier.
  • Earnings: Operating loss was $31.8 million versus $9.0 million; net loss attributable to Shimmick was $33.3 million, or $1.30 per share, versus $9.3 million, or $0.43 per share. Adjusted EBITDA, a non-GAAP measure, was negative $24.1 million versus negative $1.1 million.
  • Cash flow: Operating activities used $35.0 million, compared with $26.2 million used a year earlier. Investing activities used $7.4 million, including $4.6 million of capital expenditures and $3.0 million of joint-venture contributions. Financing activities provided $6.7 million. Cash, cash equivalents and restricted cash fell $35.7 million to $28.2 million; unrestricted cash was $27.3 million.
  • Liquidity and debt: Current assets were $225.7 million and current liabilities $269.8 million, a $44.1 million working-capital deficit. Debt outstanding under the revolving facility was $31.7 million ($31.5 million net of issuance costs), versus $29.9 million at year-end. Long-term lease liabilities were $14.9 million, with an additional $8.2 million of current lease liabilities.
  • Balance sheet: Total assets were $378.0 million, total liabilities $339.9 million and stockholders’ equity $38.1 million at March 29, 2024.

Material changes versus the prior comparable period

  • Revenue declined mainly as Foundations and Legacy Projects wound down: Foundations revenue fell 67% to $6.6 million and Legacy revenue fell 59% to $23.1 million. Shimmick Projects revenue rose 2% to $90.3 million.
  • All three project groups reported negative gross margin. Legacy Projects generated an $11.1 million gross loss, Foundations Projects a $4.4 million gross loss, and Shimmick Projects a $0.4 million gross loss.
  • Management cited cost overruns on subcontracted foundation work, change-order-related costs on Shimmick Projects, and overruns on certain Legacy Loss Projects affected by the pandemic, design issues and other factors. Contract estimate revisions reduced gross margin by $18 million in the quarter, primarily due to increased forecast costs on loss jobs.
  • Operating cash use increased by $8.8 million year over year, while capital expenditures rose from $2.5 million to $4.6 million. Cash and cash equivalents declined from $62.9 million at December 29, 2023 to $27.3 million at March 29, 2024.

Outlook, management commentary, risks and unusual items

  • Backlog and revenue visibility: Backlog exceeded $1.0 billion, with more than half in water projects. Remaining performance obligations were $1.0 billion, with a 2.1-year weighted average life. Management cautions that backlog is uncertain: substantially all contracts may be canceled or modified, and backlog contracts may not be profitable.
  • Liquidity outlook: Management said operating, investing and financing cash flows were expected to fund operations for at least the next 12 months, while acknowledging that cash needs, access to capital and future cash flows are subject to uncertainty. No specific earnings or revenue guidance was provided.
  • Debt developments: At March 29, the company was not compliant with the leverage covenant under its then-existing revolving facility. On May 20, 2024, an amendment replaced that covenant with a $5 million minimum-liquidity requirement; the company reported compliance with amended covenants. The facility’s stated maturity was September 30, 2024. Also on May 20, the company entered a new revolving credit agreement providing up to $60 million, maturing May 20, 2029, at one-month Term SOFR (1% floor) plus 3.50%. It is secured by substantially all company and borrower assets, and includes a leverage covenant tested beginning in fiscal Q3 2025.
  • Asset sales: The company agreed to sell its non-core Foundations Projects assets for $17.5 million ($15 million cash and a $2.5 million note), with proceeds intended to repay revolving borrowings. A non-binding letter of intent contemplated an approximately $22 million sale-leaseback of its Tracy, California equipment yard, also to repay borrowings.
  • AECOM settlement and dilution: On May 20, 2024, Shimmick and AECOM agreed to mutual releases of specified claims and dismissal with prejudice of AECOM’s Delaware Chancery Court action. Shimmick agreed to issue AECOM 7,745,000 shares: 5,144,622 were issued on May 20, and the remaining 2,600,378 require stockholder approval under Nasdaq rules.
  • Key risks: Fixed-price project execution and cost-estimation risk; pending change orders and claims; customer concentration; subcontractor, labor, materials and bonding availability; seasonality and weather; and joint-venture guarantees. Two customers represented 36.0% of quarterly revenue and 46.8% of net receivables. The company could not estimate the maximum potential payments under certain joint-venture performance guarantees.
  • Controls and contingencies: Management concluded disclosure controls were not effective at March 29, 2024 because of previously identified material weaknesses in internal control over financial reporting. Remediation was underway but had not been tested long enough to conclude it was effective. Management said other ordinary-course claims were not material to the financial statements; amounts for potential joint-venture guarantee payments were not estimable.
  • Seasonality: Management says revenue is typically lowest in Q1 and highest in Q3; accordingly, Q1 results are not necessarily indicative of full-year results.

Important facts for investors to verify

  1. Progress, remaining exposure and cash costs on Legacy Loss Projects, including further changes to cost-to-complete estimates and claims recoveries.
  2. Cash use, working-capital needs, liquidity covenant compliance and borrowing availability under the amended and new credit agreements, including collateral and maturity terms.
  3. Completion and proceeds from the Foundations asset sale and the proposed equipment-yard sale-leaseback.
  4. Approval and issuance of AECOM’s remaining 2,600,378 shares, and the resulting ownership dilution from the full 7,745,000-share agreement.
  5. Whether backlog converts to revenue and profitable cash flow, given contract cancellation rights, the 86% fixed-price backlog mix and customer concentration.
  6. Remediation and testing of the material weaknesses in internal control over financial reporting.