Shimmick Corporation Common Stock (SHIM) 12 Nov 242024 Q3 Earnings call transcript

Good day, and welcome to Shimmick Corporation's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to Anthony Rasmus, Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss Shimmick's Third 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.

You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to comparable GAAP financial measures.

With that, it's my pleasure to turn the call over to Steve Richards, Shimmick's CEO.

Good morning, and thank you all for joining today's call. I'm joined by Amanda Mobley, Shimmick's Interim CFO. Earlier this month, we announced the settlement of our last major outstanding claim of our Legacy Loss Projects under the terms of the settlement in our Golden Gate Bridge project, where we received $97 million before the end of the year as reimbursement for costs incurred on the project.

We're pleased to have reached the resolution of this claim, and I will provide more details in a minute.

With the large legacy settlements behind us, I felt it was time to hand off Shimmick to a new leader. I'm proud of what we've accomplished at Shimmick and over my 43-year career. The projects we do make a difference in people's lives, and I've had the opportunity to work with an outstanding team who is focused on operational excellence.

As we look forward to the next chapter, I am pleased to announce Ural Yal as Shimmick's new CEO. Ural has extensive knowledge of both the California and the water and critical infrastructure market. He is well qualified to lead Shimmick, and I'm excited for what the company can offer in the future. Ural will officially step into the role as Shimmick's new CEO on December 2, 2024. I thank everyone who has supported me over my career. I'm excited to introduce Ural and working with him over the next few months to ensure a smooth transition.

Turning back to the business results. We delivered third quarter 2024 revenues of $166 million and experienced a net loss of $2 million with an adjusted EBITDA of $30 million. Shimmick's projects revenue totaled $101 million in the third quarter versus $110 million a year ago. Shimmick project gross revenues were 6% for the quarter, a decline of 15% gross margin in the third quarter of 2023, driven by wind down and completion of projects, partially offset by new work.

We remain encouraged by the margin performance trend in 2024 as this is the second straight quarter with sequential margin improvement compared to 5% in the second quarter 2024 and negative 1% in the first quarter.

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 those results.

Finally, I want to address briefly the recent election, which we don't expect to have a material impact on our business. Infrastructure typically has bipartisan support. And in California, we expect to see additional opportunities from the recently passed California Proposition 4, which authorizes bonding for $10 billion for infrastructure-related projects that address climate change with the largest allocation of nearly 40% focused on water projects.

Turning to the next slide. Shimmick through its consolidating joint venture with Danny's Construction Company, LLC, the Shimmick/Danny's joint venture, will receive $97 million before the end of this year as a result of our settlement agreement on the litigation of our Golden Gate Bridge project. Under the terms of the settlement, there will also be a contract change order for reduced scope of work of $6 million and a contract change order for extension of project completion and costs incurred on the GGB project.

After paying subcontractor pass-through claims, we plan to use the remaining proceeds for ongoing operations, including completion of the Golden Gate Bridge project.

We are expected to reach substantial completion of this on-site portion of the project in the third quarter of 2025 with the remaining work after that related to the subcontractors off-site equipment fabrication activities.

We are proud of the work that has been done on this project, which installed life-saving suicide prevention net on the iconic Golden Gate Bridge.

It is a difficult working environment with the heights, the weather and the travel control.

Our team has done an exceptional job on the project.

We are pleased to have settled the claim as another step forward in our transformation plan. We look forward to being able to further focus our efforts and financial resources on advancing our core projects.

Turning to the next slide. I'd like to highlight our recently completed project at the Smith Canal Gate. We began work on this project in July 2020 to address critical flood protection needs for the San Joaquin area. Shimmick solutions included constructing a fixed cellular sheet pile floodwall along the San Joaquin River, a miter gate structure with temporary in-water works and shoring, improvements to Dad's Point and enhanced access to the Stockton Gulf and Country Club.

These elements protect the canal from high water events while allowing essential access for boaters during normal conditions.

With the project now completed, these improvements significantly enhance Stockton's flood resilience, protecting homes and business from high water events while meeting state and federal standards.

Again, this is just another project that exemplifies Shimmick's commitment to delivering sustainable infrastructure solutions that benefit both communities and the environment. With that, I'd like to turn the call over to Amanda, who will discuss our financial results.

Thanks, Steve. On behalf of the company, I want to thank you for your leadership in bringing Shimmick to this point.

You have been an integral part of establishing a strong foundation for future growth.

We are grateful for all your contributions and congratulate you on your 43-year career. I look forward to working with you and Ural on this smooth transition, and I'm excited to have him join us.

Turning back to the financials. All comparisons made today will be on a year-over-year basis compared to the same period in 2023.

For the third quarter, we reported revenue of $166 million compared to $175 million for the prior year period, which includes the impact of the GGB project settlement, which I will discuss in a minute.

Moving on to the Shimmick Projects. Revenue recognized on Shimmick Projects that focus on water infrastructure and other critical infrastructure was $101 million in the third quarter 2024 compared to $110 million a year ago. The decrease was primarily the result of a decrease from lower activity on existing jobs and jobs winding down, partially offset by revenue from a new water infrastructure job.

Gross margin recognized on Shimmick Projects in the third quarter was 6% compared to 14% a year ago.

As Steve mentioned, we had our highest reported gross margin percentage of the year. Revenue recognized on foundation projects was $11 million in the third quarter 2024 compared to $12 million a year ago, driven by the result of timing of jobs winding down.

Gross margin recognized on the Foundations Projects was slightly lower at $2 million loss in the third quarter 2024 compared to $1 million loss a year ago. Legacy Project revenue was flat at $54 million compared to a year ago. Included in the quarter is a $31 million adjustment to revenue to reflect the GGB project settlement amount. Without that adjustment, the Legacy Project revenue would have declined by $31 million, reflecting the continuing wind down of the Legacy Projects.

Legacy Projects gross margin was $8 million in the third quarter compared to $3 million a year ago. The increase in gross margin was primarily a result of the GGB project settlement, partially offset by continued impacts of the Legacy Projects winding down as well as additional legal fees to pursue contract modifications and recoveries and additional cost overruns on other Legacy Loss Projects.

As a reminder, as these 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 be recognized in the period.

We continue to actively pursue all opportunities to offset these costs.

This quarter, we also recognized a onetime primarily noncash expense of $16 million relating to our decision to enhance our current ERP system rather than implementing a new platform. We believe this decision will reduce overhead expenses in future periods.

Our net loss for the third quarter 2024 was $2 million compared to a net income of $35 million for the prior year. The decline is largely related to the ERP impairment and a decrease in gain on sale of assets of $13 million.

The gain on sale change is a result of the $30 million gain on sale of our O&M business in Q3 last year that did not reoccur, offset by $17 million gain in the sale of the equipment yard this year.

Third quarter adjusted EBITDA was a gain of $30 million compared to $42 million in the prior year period, again, primarily due to the change in gain on sale.

Over to the balance sheet. Unrestricted cash and cash equivalents at September 27, 2024, totaled $26 million and availability under the revolving credit facility and the credit facility totaled $18 million and $15 million, respectively, resulting in a total liquidity of $59 million. The liquidity position will continue to strengthen in 2024 with the proceeds from the GGB project settlement.

Our backlog remains strong and was $834 million at the end of the third quarter. The mix of our backlog continues to improve as Shimmick Projects represent 85% of the backlog at the end of the third quarter versus the 80% a quarter ago. This reinforces our team's commitment to be selective during the bidding process and focus on more profitable jobs that drive margins higher in our business.

For the fiscal year ending January 3, 2025, after excluding noncore Foundations Projects, we now expect that Shimmick Projects revenue to remain generally flat with gross margin between 4% to 7%. Legacy Projects revenue of $90 million to $95 million with negative gross margin of 40% to 50% due to the Legacy Loss Project settlement, additional costs recorded for a Legacy Loss Project relating 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 excellence as well as our efforts to work off our legacy projects.

As we work to close out these jobs and with the transformation plan efforts, we believe we will show growth in 2025. And with that, I'd like to turn it over to Steve now for some additional remarks.

Thanks, Amanda. In conclusion, we are pleased to have resolved the last major outstanding claim and are encouraged to move forward by putting these distractions behind us. We're excited to enter this next phase in our strategic transformation, and we're confident in our team's capabilities to source water-related projects that fit well into our portfolio.

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 Instructions] Our first question comes from Gerry Sweeney, ROTH Capital Partners.

I just want to start on the Shimmick revenue side, right? So gross margin, 6% heading in the right direction. Should we -- all things being equal, I understand projects are different. But as we move through the rest of this year into next year, should we see this gross margin increase?

My sense would be the backlog is -- contains, I guess, higher margin or higher bid margin projects. Is that a fair assumption?

I can start and you jump in. Yes, Gerry, I think that as we get through the backlog and especially as we add new backlog, higher margin work, I think the math would tell you that we should see improvements. Amanda, anything?

Yes, that's exactly right. We'll continue to see the Legacy Projects wind down in '25 and replace that with higher-margin work to increase the margin.

How is bid activity progressing? I believe a lot of work out there, but maybe some bids have been pulled on occasion because there are only single bidders, et cetera. That work is not necessarily going away, but I think people were looking for additional bidders per se, but -- or a larger amount than just one. But can you give us an idea as to how the opportunities are sort of amassing in the background?

Yes. The bid continues to increase.

We are loading up our estimating resources. We've heard more estimators, and that's a reflection of the number of opportunities out there. And I'd say to your point, we still see -- as we filter the projects through our system of what's best for Shimmick, we still see a lot of good water projects, for example, that are in the 1, 2, 3 bidders. And with our increased estimating resources, I see that, absolutely, we'll capitalize on our opportunities.

And are those projects sort of fitting your criteria? I know historically, I think you mentioned looking around for 15% gross margins. But I wanted to see if those projects are meeting that criteria.

Yes. When we filter jobs to make a go decision on the bid, certainly, we're looking at those that have the best margin opportunity and definitely seeing projects that are still in that upper teens from an opportunity standpoint.

Shifting gears a little bit, Legacy Projects, great to see the Golden Gate Bridge settled. The question I had was, I think just doing the math, there's about $125 million left on Legacy Projects. How much of that is Golden Gate? How much of that is, I think, the lock project? And maybe how much of that is maybe some other loose tag ends of other projects?

Go ahead, Amanda.

Yes. Currently, we're about 80% done on GGB.

So there's about $40 million of backlog remaining. We'll reach substantial completion this year in 2025 and continue to be on there with a little running through 2026 as well.

And is the remainder -- so that would be about $85 million for the lock project, give or take?

Yes, that's correct.

And then will those projects carry the sort of the negative gross margin that you projected for the rest of this year? Or will that gross margin have a potential to improve in 2025 because some of the costs have been allocated, et cetera? I think some of the margins are hit by period costs that sort of updated within that -- update costs within a specific quarter. But I think you understand what I'm asking.

Yes. Those are loss jobs that currently have 0 margin on them. And you're right, we do recognize period costs, primarily legal as we've been incurring those costs to go after these claims.

And so going forward, we shouldn't -- we won't have those high legal costs with the settlement of these behind us.

So that should help improve that sort of negative gross margin.

We would estimate that would be 0 margin on those loss jobs going forward.

And then one last question on the cash on the balance sheet for the end of the quarter. Does that include the lock settlement? Had that been received or recorded?

That was received during the quarter, and those proceeds were used to pay down some of the debt on the credit facility.

Our next questions come from Aaron Spychalla, Craig-Hallum.

First for me, just as part of the transformation plan and kind of reducing the cost structure, can you just talk about where OpEx could go as you kind of focus on that with the ERP system costs? It sounds like the legal costs are more on the cost of goods sold line, but just talk about how that could trend as we look towards 2025.

You're talking to the SG&A and how we look at that?

Yes.

Yes. We still see more efficiencies coming as we focus our work on California, we -- I mentioned earlier, we have made an investment in estimating resources.

So that's a positive, if you will, from a cost standpoint, it is negative, but definitely add some resources to gaining new work.

As we grow the top line a little bit, SG&A as a percentage will go down. Other -- we do have other transformation items as the other backlog of work burns off, some of the Legacy Projects burn off, our Foundations business will burn off soon.

And so we should see some margin -- or some SG&A improvements with that as well.

And then I appreciate the commentary on the election and kind of regulatory environment. Can you just talk a little bit about on that pipeline? I know you've hired some estimators, but just how are you kind of thinking that transitions into backlog here moving forward? Can we -- do you expect some projects later this year? Is it kind of more first half of '25? Or just curious if you can kind of elaborate a little bit on kind of the pipeline dynamics.

Yes. We really don't see work being seasonal for us.

So we definitely have some nice projects that we're bidding in Q4 that are in the pipeline right now.

And so look to see win our share would be the theme as we finish off the year. And definitely, the projects continue to come in at a nice rate in early '25 as well.

So don't see any decline in bidding activity for sure. And with the new money coming in, whether it be Prop 4 or other things, that definitely a lot more opportunities in the pipeline.

And then maybe last for me, just on the balance sheet with getting the Golden Gate proceeds by year-end. Can you just kind of talk about how you're thinking about capital allocation in 2025? It sounds like there's some that goes to that project, but just what are some of the priorities for that kind of large cash balance that you should see by year-end?

I'll start and then Amanda can jump in. But definitely, the GGB settlement is fantastic for the company. It takes a load off of the liquidity needs that we have to finish the job. I want to point out that the job, it will largely finish the work in the field, the suicide net themselves and the access work to the suicide nets will be completed in late '25.

And then from then on, it's subcontract activity off-site to complete the fabrication of the travelers. The installation of that work has been eliminated from the contract through the settlement agreement with the district.

So it's a positive from the company as far as the risk going forward on the GGB. But Amanda, do you want to address Aaron's question on use of funds?

Yes.

So it's positive on the liquidity for the company as well to -- we get the cash in and we've used those to pay down the debt as well as use for just ongoing operations as well as just continuing to close out and finish these legacy jobs.

It looks like there are no further questions at this time. We'd like to thank everyone for your participation. This does conclude today's teleconference.

You may disconnect your lines at this time.