Shimmick - Q2 2024
August 16, 2024
Transcript
Operator (participant)
Greetings, and welcome to Shimmick's second quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Rasmus, Investor Relations. Please go ahead.
Anthony Rasmus (Investor Relations Officer)
Good morning, and thank you for joining us on today's conference call to discuss Shimmick's second quarter 2024 results. Slides for today's presentation are available on the investor relations section of our website, www.shimmick.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our investor relations website. We do not undertake a duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures.
Aaron Spychalla (Senior Research Analyst)
You should refer to the information contained in the company's second quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, it is my pleasure to turn the call over to Steve Richards, Shimmick's CEO.
Steve Richards (CEO)
Good morning, and thank you all for joining us on today's call. I'm joined by Amanda Mobley, Shimmick's Interim CFO. We settled one of the two legacy lock project claims for $33 million of cash to be paid sometime later this year, which will improve our liquidity. The settlement also eliminates distractions and continuing legal costs and is key to continuing our transformation. As part of the settlement, the quarter includes a $23 million reduction in legacy projects revenue, an additional $7 million in gross margin, which Amanda will further discuss later. After accounting for the settlement, we delivered second quarter 2024 revenues of $91 million and experienced a net loss of $51 million, with an adjusted EBITDA loss of $40 million. Shimmick projects revenue totaled $84 million in the second quarter versus $103 million a year ago.
Aaron Spychalla (Senior Research Analyst)
Shimmick project gross margins were 5% for the quarter, a decline from 8% gross margin for the first quarter of 2023, driven by schedule extensions, pending change orders, and increased costs. That said, we're encouraged by the 6% sequential margin improvement as compared to the first quarter of 2024 on this front and look forward to building off this momentum. As we did on our last call, we'll provide a breakdown of results between Shimmick projects, projects that began after the AECOM sale transaction, and legacy projects, those that started before the AECOM sale transaction. Amanda will provide more details specifically related to the breakdown of these results.
However, of note, our overall gross margin was weaker in the second quarter, primarily related to the legacy project settlement agreement and cost overruns experienced, as well as additional legal fees on the legacy loss projects in order to continue pursuit of contract mods and recoveries from project owners. Although we are experiencing near-term headwinds due to project timing and cost issues with legacy projects, we remain encouraged by the progress we have seen converting our backlog to Shimmick projects versus legacy projects. At the end of the second quarter, Shimmick projects continued to represent a larger portion of our backlog versus legacy projects. Additionally, our overall backlog remains strong at $923 million as of the end of the second quarter.
We continue to have a robust pipeline of future work, which we expect to grow alongside increases in federal funding and a growing demand for water. As we described on the last call, we added estimating personnel late in the second quarter to be responsive to this pipeline of work. We're beginning to see the uptick in our bidding efforts bear fruit. Most recently, following the end of the second quarter, we secured a win for a $14.5 million project for Delta Diablo Cogeneration System replacement in Antioch, California. The Delta Diablo operates an existing cogeneration system at the wastewater treatment plant, once again, reinforcing our go-forward focus on water-related projects. The cogeneration system improvements project will include the demolition of the existing plant and replaced with a new cogeneration engine, digester gas conditioning equipment, exhauster systems, and boiler.
This also includes upgrades to the electrical and control infrastructure and demolition of an existing digester gas storage sphere. Shimmick's work will aid the district's resource recovery capabilities, reduce grid power consumption, and promote more efficient and reliable plant performance. More than 75% of our work is generated from repeat customers. Public customers and associated public funding allows for a predictable, long-term flow of programs and projects. Shimmick's core market vision is coming to reality with a more asset-light, higher margin, water-focused company, targeting projects that make use of significant insourcing technical skills on projects that average three years in duration. I'd like also to take some time to address the update on Shimmick's transformation. As many of you are aware, Shimmick has a long history of successfully winning and delivering complex water and other critical infrastructure projects in the state of California.
The market for water and critical infrastructure projects in California has consistently grown each year, with the size and complexity of projects forecasted to grow for decades. Today, the company announced initiatives as part of our transformation plan to increasing our focus on the California water and critical infrastructure market. These initiatives include increasing the bid activity by increasing the number of estimators in Southern and Northern California, rightsizing our cost structure by reducing our overheads in non-core areas, and redefining our operating model with a renewed focus on supporting the field to safely deliver projects on time and on budget for our clients across California. Our transformation at Shimmick is well underway, and we continue to work towards repurposing our operations to best position ourselves to capture the market we see in the California market.
Turning to the next slide, I'd like to take a moment to highlight our recently completed $42 million project at the Richmond Wastewater Treatment Plant, which has been a significant milestone for both Shimmick and the City of Richmond. In 2010, the Richmond facility was identified as needing critical rehabilitation due to its impact on the San Francisco Bay Area. To address this, Shimmick was brought in to execute a series of high-priority upgrades designed to improve treatment quality and meet both current and future environmental regulations. Shimmick constructed new buildings, upgraded the aeration basins with state-of-the-art forced air diffusion systems, and removed outdated and unused facilities. These strategic improvements have not only enhanced the operational efficiency of the plant, but also reduced its environmental footprint. Now, with the project successfully completed, the Richmond Wastewater System operates more efficiently.
The new project has significantly reduced energy usage, chemical treatment needs, and greenhouse gas emissions, while cutting costs for the city. This means a cleaner environment, reduced odors, and overall improved quality of life for the residents of Richmond. This project is a testament to Shimmick's commitment to delivering sustainable infrastructure solutions that benefit both communities and the environment. We are proud of the outcome and look forward to continuing our work in this vital sector. With that, I'd like to turn the call over to Amanda, who will discuss our financial results.
Amanda Mobley (Interim CFO)
Thanks, Steve. All comparisons made today will be on a year-over-year basis compared to the same period in 2023. For the second quarter, we recorded revenue of $91 million compared to $155 million for the prior year period, primarily as a result of the legacy project settlement mentioned earlier and discussed more on the next slide, and from lower activity on existing jobs and jobs winding down, partially offset by an increase in the revenue driven by a new water infrastructure job. We had a net loss of $51 million compared to a net loss of $10 million for the prior year period. Again, largely as a result of the legacy project settlement, as well as equity and loss of unconsolidated joint ventures.
Aaron Spychalla (Senior Research Analyst)
Second quarter Adjusted EBITDA was a loss of $40 million, compared to a loss of $2 million in the prior year period. Revenue recognized on foundations projects was $8 million in the second quarter of 2024, compared to $9 million a year ago. The $1 million decline in revenue was a result of timing of jobs winding down. As a reminder, we entered into an agreement to sell the assets of non-core foundations projects and will wind down work during the year. Gross margin recognized on foundations projects was a negative $2 million and a negative $7 million for the three months ended June 28, 2024, and June 30, 2023, respectively.
The increase in the gross margin was a result of cost overruns incurred on two jobs during the three months ended June 30, 2023, which were substantially completed during the 2023 fiscal year. Legacy projects revenue decreased by $44 million to a negative $2 million compared to 2023, and to gross margin of negative $34 million, primarily impacted by the legacy project settlement and cost overruns and continued legal costs. As the legacy loss projects continue to wind down to completion, no further gross margin will be recognized, and in some cases, there may be additional costs associated with these projects, which will all be recognized in the period. Revenue recognized on these legacy loss projects was a negative $7 million and $27 million for the three months ended June 28, 2024, and June 30, 2023, respectively.
Gross margin recognized on these legacy loss projects was a negative $32 million for the three months ended June 28, 2024, and a negative $1 million for the three months ended June 30, 2023. We continue to actively pursue all opportunities to offset these costs. Turning to the balance sheet, unrestricted cash and cash equivalents at June twenty-eight, 2024, totaled $22 million, and availability under the revolving credit facility and credit facility totaled $7 million and $6 million, respectively, resulting in total equity of $35 million. Turning to the next slide, as Steve mentioned earlier, we expect to receive $33 million in cash related to a claim on a large legacy project later this year. However, our second quarter results were impacted by a change in estimate from the settlement agreement and on the legacy loss project.
As a result of the settlement and previously estimated contract revenue, the company recognized a net loss of $30 million, which includes a $23 million reduction to revenue and a $7 million adjustment to forward loss reserve, recorded within the condensed consolidated statements of operations for the three and six months ended June 28, 2024. While this obviously impacted our revenue recorded in the quarter, we expect to receive cash payment later this year, which has helped support our liquidity position and eliminates the continuation of litigation costs. On August ninth, 2024, we completed the previously disclosed transaction for the sale-leaseback of our equipment yard in Tracy, California. The agreement contemplated the sale of the equipment yard for $20.5 million and allows us to continue using the property under a seven-year lease.
We received net proceeds of $17 million after adjustments for prepaid rent through February of 2026 and related closing costs. The equipment yard had a net book value of approximately $3 million, and the remaining $17 million of net proceeds received from the transaction were used to repay borrowings under the revolving credit facility. For the fiscal year ending January third, 2025, after excluding non-core Foundations Projects revenue of $64 million for the fiscal year ending December 29, 2023, we now expect that Shimmick projects revenue to remain generally flat, with gross margin between 4% to 9%. Legacy Projects revenue of $55-$65 million, with negative growth margins of 80%-90%, due to the legacy loss project settlement. Additional costs reported for the legacy goss project related to pending change orders and other cost overruns.
The guidance reflects our execution on our strategy, a robust pipeline, the improving quality of our backlog, and our continued operational execution, as well as our efforts to work off our legacy projects. We believe that our results will be back-half weighted in 2024, with further strong momentum for growth in 2025. With that, I'd like to turn it over now to Steve for some additional remarks.
Steve Richards (CEO)
Thanks, Amanda. In conclusion, we are encouraged by the continued progress made in working off the legacy loss project backlog. It is important to note that we are approaching the finish line related to the legacy loss projects and hope to have these distractions behind us as we close 2024 and enter 2025. We expect a jury trial to be held in the second half of the year on claims on our other large legacy loss job. Shimmick projects are beginning to correct itself, albeit slower than we anticipated. We believe these challenges to be short term in nature, as Shimmick continues to be favorably positioned to take advantage of the sizable market opportunities ahead, and we continue to expect new project startups to advance. It's important to reinforce that our strategy for our core business remains unchanged.
Aaron Spychalla (Senior Research Analyst)
Our vertical integration minimizes risk, and our strategic shift towards a higher margin, low CapEx portfolio, coupled with potential M&A activities, positions us for enhanced margins and growth. We want to once again thank our team for their tireless efforts as we work to transform Shimmick into one of America's best water infrastructure companies. Operator, you may now open the line for questions.
Operator (participant)
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. Our first question today is coming from Gerry Sweeney of Roth Capital Partners. Please go ahead.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Yeah, good morning. Thanks for taking my call.
Steve Richards (CEO)
Hey, morning, Gerry.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Steve, I was wondering if you could give us a little bit of maybe qualitative background on, you know, the new projects out there, the activity, not so much projects that you won, but what you're seeing in terms of the funnel and maybe thoughts on how some of that translates over the next, you know, two, three, four, five, six quarters.
Steve Richards (CEO)
Sure. We're seeing a lot of activity in the California market, Southern California, Northern California, both. The projects fit our profile. With the number of projects out there, really having to filter them down to being those projects that we like in size, $50-$150 million, three-year average duration. And so we've seen a lot of those projects. What I've been most encouraged about is that a good amount of that work is allowing us to self-perform up to our target amount of about 75%. So good pipeline. We're adding more estimators, actually, Gerry, to take on the pipeline that we see both in the Northwest and Southwest divisions, plus our electrical division of work. So pretty excited about it all.
Aaron Spychalla (Senior Research Analyst)
Got it. And then obviously on the legacy projects, could you, I think you gave a little bit of guidance on that front. Could you just go over that again real quick, and then I probably have some follow-up questions on that front.
Yeah. Amanda will jump in with me on this, but what we see happening, we mentioned in our release that we see one of the legacy projects entering into a jury trial later this year. So we're encouraged by that to get by that claim from a backlog standpoint and working that job off. We've got the majority of the most difficult part of the job nearly complete. It'll finish off in the spring, and then we'll enter into a more traditional installation of a manufactured piece of the work. The other project, again, the interim milestones for the most difficult work are approaching completion by the end of 2024. Overall completion would be later in 2025 for the majority of the project.
Amanda, do you wanna add any color as far as the backlog numbers and what's to burn on the Legacy -a contract?
Amanda Mobley (Interim CFO)
... You know, I was gonna, yeah, I hit on kind of the same remarks there, that we'll continue to see the backlog winding down and the legacy jobs, the majority of that will be done through 2025, and a little going into2026 there, continue to decrease the backlog.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Got it. And then, obviously, you had a settlement on the lock project, and then you have this other project that you're going to trial on. But I was curious if there is an opportunity for any other or are there still claims outstanding that you could recoup some losses?
Steve Richards (CEO)
Yeah, sure. Normal course of business for us, we always see change orders coming through the system, and they have the potential to improve not only margins, but certainly cash flow.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Got it. And how much in the quarter were legal fees? And obviously, as you get closer to some of these trials, legal fees ramp up, but, just curious as to maybe a more normalized, even as G&A, once you get through some of this, you know, these settlements and this trial, what would sort of be a normalized G&A run rate?
Steve Richards (CEO)
Amanda, do you want to hit on the legal fees that were incurred in the quarter?
Amanda Mobley (Interim CFO)
Yeah.
Steve Richards (CEO)
I'm not sure that's readily available, but-
Amanda Mobley (Interim CFO)
Yeah, we would just see more information in the queue, that will come out later, but for the legal fees, about $2 million for the quarter.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Okay. Got it. Okay.
Steve Richards (CEO)
And you're right, Gerry. As we approach the trial, you know, for example, those fees really ramp up from the standpoint of the legal activity, whether it be depositions or, you know, just the pressure to be ready for the trial. Normal run rate, what Amanda just described, we would see that fall off, and so it would be an improvement for job costs and overhead.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Got it. And you just digging around here, you know, on the Shimmick projects, you talked about maybe back half loaded, and you've made some sequential improvements on gross margins. You know, barring weather or unforeseen circumstances that would slow things down, could we anticipate margins improving through the rest of the year? Is that what you sort of infer when you say back half loaded?
Steve Richards (CEO)
Yeah, that's right. Our guidance, you know, what we just came through was the lower end of the guidance, and we've got the higher range still out there. So that would tell you that we see improvements over the next two quarters.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Okay, great. All right. I know I have a follow-up with you, so I'll jump back in line, but thanks.
Steve Richards (CEO)
All right. Thanks, Gerry.
Amanda Mobley (Interim CFO)
Thank you.
Operator (participant)
Thank you. The next question is coming from Aaron Spychalla of Craig-Hallum. Please go ahead.
Aaron Spychalla (Senior Research Analyst)
Yeah. Good morning, Steve and Amanda. Thanks for taking the questions. First, you know, you talked about a new operating model. Can you just share a little more on what that entails? You know, you kinda hit targeted project size a little bit, $50 million-$150 million. But just anything, you know, margins, anything else behind that would be helpful.
Steve Richards (CEO)
Yeah. So geographically, we'll be focused on the California area. We're already set up there with our regional offices, headquarters in Irvine, and then our major regional office in Suisun City, which is a little bit east of Oakland. So we've got the right geographic presence for not only our estimating teams that know the local supply chain, know the local market, but also our leadership and the key staff that are running the jobs. So, feel really good about that and the craft labor that's following us. I think that from a margin standpoint, you know, we haven't seen a drop in margin opportunity as we're bidding work.
Aaron Spychalla (Senior Research Analyst)
You know, for us, the key is that we find the right mousetrap to win a job, to find that best way to finish the cost of it most efficiently, and we'll get our share of the market, so we see you know, in that upper teen area still as being the target area for job margins.
All right, thanks for that. And then just on the addition of, you know, more estimating personnel, with the pipeline you have today and just expected growth, you know, how are you feeling about just labor capacity and labor availability in the market and just kinda overall capacity for your business as you move forward?
Steve Richards (CEO)
Right. Well, what we're able to do with, with our teams, first of all, is we're able to work share across, regions. And so, we've got folks, that are, coming out of our, you know, de-emphasis on the national market to be having them as the additional support for our California pursuits, and so that's a value add immediately that we can transfer over. From a standpoint of recruiting other staff, you know, this is a great networking business. We've got a lot of connectivity in the industry and feel good about being able to get those right people. We're really, scrutinizing the folks that we bring on. We wanna bring those that have not only the talent but the right culture fit for Shimmick, and feel good about what we've, who we've recruited so far.
Aaron Spychalla (Senior Research Analyst)
All right, thanks for that. And then just on, you know, the new projects. I mean, you got the guidance out there, obviously, for the year and the back half, but it sounds like, you know, starting to see project execution improve after just some of the higher, you know, kind of start-up costs and delays that you saw earlier this year.
Steve Richards (CEO)
Yeah, that's what we're seeing. Yeah. We're seeing, for example, last year, we started the major project we won in Elsinore, and that job is well past mobilization now and into its run rate of revenues and margins are in keeping pace. So that would be a good example of what we see through the balance of the year on jobs that move the needle for us.
Aaron Spychalla (Senior Research Analyst)
All right, thanks. And then just maybe last question on cash flow. You know, can you just kinda talk about how you think that trends in the coming quarters and just kinda outlook as we head into twenty twenty-five?
Steve Richards (CEO)
Yeah, the activities over the last quarter have been significant, not only previously we had announced the asset purchase or sale of the foundations business, but and those assets finishing that work as Amanda mentioned in her remarks finishing that work up later this year. So that provides some liquidity. And then in addition, the sale-leaseback of the 17 billion provides a cash into the system. And then certainly the settlement with the Corps of Engineers for the $33 million sets us up nicely from a liquidity standpoint. So feel very good about the decisions we made to improve the liquidity and sets us up well for not only the balance of the year, but finishing those projects.
Aaron Spychalla (Senior Research Analyst)
All right, sounds good. Thanks for taking the questions. I'll turn it over.
Steve Richards (CEO)
Thanks, Aaron.
Amanda Mobley (Interim CFO)
Thank you, Aaron.
Operator (participant)
Thank you. Ladies and gentlemen, that concludes today's question and answer session and today's conference call. We would like to thank you for your participation and interest in Shimmick Corporation. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.